VAT Schemes - One Size Doesn’t Fit All

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“Why have a dog and bark yourself”, so the old saying goes.  HMRC certainly apply this thinking by requiring 2.7m businesses to collect tax for them?  Like it or not, VAT registered businesses all have a legally imposed sideline as tax collectors for the Government.

It’s all rather simple really –

  1. Charge VAT on your sales to you customers.
  2. Offset the VAT that you have been charged by your suppliers.
  3. Tell HMRC about your tax collecting activities every three months (by submitting a VAT return).
  4. Pay over the VAT due to (or sometimes claim a refund from) HMRC.

Well …  not so fast.  This approach, snappily referred to as the Standard VAT Accounting Method, may not suit some businesses.

HMRC recognise this and offer three alternative approaches which they call “ VAT Schemes”.  It may benefit your business to consider using one or more of these.

 

Annual Accounting Scheme

The process is similar to the Standard Method except that you are only submit a return once a year.  You will need to estimate how much VAT will be payable and pay this by 9 monthly or three quarterly instalments.  A final balancing payment or refund is made at the end of the year.

This scheme helps with budgeting and cashflow planning, especially if your business is seasonal.  There is less administrative work in the submission of returns.   It is specifically targeted at small businesses with the qualifying criteria being annual turnover at a maximum of £1.35m

 

Flat Rate Scheme

This scheme is only available for businesses with an annual turnover up to £150,000 and delivers a great simplification of the VAT rules.  Different industries have different “flat rates” of VAT.  (Lookup Your Industry Rate Here)   You then pay over to HMRC this percentage of the total VAT inclusive sales revenue without having to account to HMRC for every sales and purchase transaction.  There is even a discount available in your first year !

By way of an example a lawyer has a rate set at 14.5%.   When a customer is charged £1,000 in fees an invoice for £1000 + 20% VAT = £1,200 is raised.   The lawyer must pay over to HMRC 14.5% of this £1,200 = £174.  The difference between the £200 of VAT charged and the £174 paid to HMRC reflects the assumed typical level of VAT incurred in delivering the legal services.  Your business may, when compared to the Standard Method, gain or lose from the application of this scheme.  It is though important to recognise the reduction in administration work when making this gain or loss assessment.


Cash Accounting Scheme

Perhaps the most used and most useful of the schemes this also caters for businesses with an annual turnover of up to £1.35m.  Under the cash accounting scheme, you apply a similar approach to the Standard method of accounting, but you only include sales and purchase transactions when they have been paid for.

This scheme is therefore good for cashflow planning and especially if you have slow payers.  You do not have to pay VAT to HMRC that you haven’t yet received from your customer.  Accounting software such as Xero and Quickbooks can, as an option, automatically process transactions in accordance with this scheme and you do not need permission from HMRC to use it.

 

Each business faces different circumstances and challenges but HMRC recognise this and seek to provide different options to small businesses to enable them to administer VAT as efficiently and painlessly as possible. If one or a combination of these alternative schemes would better suit your business they are there for you to use.

Thank you for reading

Ian Jarvis