FAQ

In addition to the standard VAT accounting there are three VAT schemes designed to simplify the process for small businesses (including those that are partially exempt):

Flat rate scheme

Designed to encourage small businesses to register for VAT, with this scheme, you charge VAT at the appropriate rate but pay VAT to HMRC at a lower rate. Your business’s turnover must be less than £150,000 to qualify for the flat rate VAT scheme.

The big advantage of this scheme is that you don’t have to keep a record of the VAT you charge on every sale or pay VAT on every purchase. Instead you can calculate your VAT payments as a percentage of your total VAT-inclusive turnover, which makes it easier and quicker to do your VAT return.

You don’t have to work out how much VAT you spend either. Instead the percentage rate you apply –  typically between 9% and 14% depending on industry sector – is designed to take account of the VAT you have spent.

From 1 April 2017, a new flat rate percentage was introduced for limited cost businesses. These are businesses whose expenditure on goods is less than either:

• 2% of their turnover
• £1,000 a year (if costs are more than 2%)

For some businesses it may be unclear if they are a limited cost business, especially if goods are close to the 2% threshold. It is likely to affect you if your main costs are services, vehicle or fuels costs, or if you do not purchase many goods.

To make this simpler HMRC has developed an online calculator to help businesses work out if they are eligible to pay the higher rate. The calculator can be used each time a VAT return is completed to clarify any uncertainty.

This flat rate scheme can be used with the annual accounting scheme. As it contains its own cash based method of accounting, it cannot be used with the cash accounting scheme.

Cash accounting scheme

You can use cash accounting if you estimate that your turnover during the next tax year will be no more than £1.35 million.

If you use standard VAT accounting, you have to pay HMRC the VAT you charge on your sales whether or not your customer has paid you. If you use cash accounting, you only pay VAT when your customer pays you. Similarly, you can only reclaim VAT once you’ve paid your suppliers.

For many businesses, this scheme offers a cash flow advantage and relief from bad debts. If you are paid promptly at the point of sale, regularly reclaim VAT or your customers pay by direct debit, you are unlikely to benefit from cash accounting.

You can use this scheme in combination with the annual accounting scheme but not the flat rate scheme.

Annual accounting scheme

You can reduce your VAT paperwork and make it easier to manage your cash flow by using the Annual Accounting Scheme.

If you use this scheme, then you make nine monthly or three quarterly interim payments during the year. These can be smaller than a typical quarterly payment under standard VAT accounting, which can help with your cash flow.

At the end of the year, you complete a single return and then either make a balancing payment or receive a balancing refund.

You can use annual accounting if you estimate that your turnover during the next tax year will be no more than £1.35 million. You can also use this scheme in combination with the flat rate and cash accounting schemes. It can also be applied alongside certain sector specific VAT schemes.

Which of the VAT schemes is right for you?

Each of these VAT schemes can help to simplify the VAT process for a smaller business. If you’re unsure which would be the right scheme (or combination of schemes) for you, it’s best to seek professional advice before making a choice.

Do you still have questions? Get in touch with our tax team to find out more about how they can help you.