need advice now?
get in touch to find the right scheme for your business
VAT SCHEMES
Explanations of the Various VAT Schemes
Your business can save time and money by choosing the right VAT Scheme. Some VAT accounting schemes have been designed for specific trade sectors, while others have been designed to deal with more general business matters. Some of the schemes can be used together.
Below are the most common schemes used by businesses:
– Cash Accounting Scheme
– Annual Accounting Scheme
– Flat Rate Scheme
– VAT schemes for retailers
– Margin schemes for second-hand goods, art, antiques, collectibles
– Annual Accounting Scheme
– Tour Operators’ Margin Scheme
THE ANNUAL ACCOUNTING SCHEME
The Annual Accounting Scheme charges VAT throughout the year in nine monthly or three quarterly instalments that are based on the VAT you paid the previous year. If you have been in business less than a year, the instalments are based on an estimate of your VAT liability. At the end of the year, you file your return. If you have not paid enough VAT, you make a balancing payment to HMRC. If you have overpaid, you can claim a refund.
ADVANTAGES
There are many advantages to the Annual Accounting Scheme including reduced paperwork. You only need to complete one annual return instead of four quarterly returns. In addition, it is easier to manage your cash flow.
DISADVANTAGES
Annual accounting is not ideal for businesses that regularly reclaim VAT as you would only get one repayment at the end of the year. Also, if your sales decrease, your interim payments may be higher than under the standard VAT accounting scheme.
CASH ACCOUNTING
Usually VAT is payable when an invoice is issued, but with the Cash Accounting Scheme, you do not need to pay VAT until your customer has paid you. You also cannot reclaim VAT on your purchases until you have paid for them.
ADVANTAGES
Cash accounting can be beneficial for your cash flow especially if your customers are slow to pay. It is also useful if you have bad debts. Under the standard accounting scheme, you have to pay the VAT on a debt even if you never receive payment from your customer. Using the Cash Accounting Scheme, you do not pay the VAT if your customer never pays you.
DISADVANTAGES
The Cash Accounting Scheme may not be for you if you regularly reclaim more VAT than you pay. Also, it may not be suitable if you buy a lot of goods and services on credit.
FLAT RATE SCHEME
The Flat Rate Scheme is designed to help small businesses reduce the amount of time they spend accounting for VAT. Using the Flat Rate Scheme, you do not have to calculate the VAT on each and every transaction. Instead, you simply pay a flat rate percentage of your sales. This percentage is less than the standard rate because it takes into account the fact that you are not reclaiming VAT on your purchases. The flat rate percentage depends on your trade sector.
ADVANTAGES
Simplified record-keeping – no need to separate the gross, VAT and net in your accounts. This means less accounting work with fewer headaches. There are fewer rules to follow and no worries about what VAT you can and cannot reclaim on your purchases. This results in less chance of mistakes. You will always know exactly how much of your earnings will need to be paid to HMRC.
DISADVANTAGES
Although the Flat Rate Scheme can reduce your paperwork, you cannot reclaim VAT on your purchases. If you buy lots of goods and services from VAT-registered business, you could end up paying more in the long run.
VAT RATE SCHEME FOR RETAILERS
With standard VAT accounting, you must record the VAT on each sale, but with the VAT retail scheme, you work out the value of your total VAT taxable sales for a period. For example, the items of a total day’s sales are taxable at different rates (standard, reduced and zero). With flat rate accounting, you would apply the appropriate VAT fraction to that day’s sales figure to calculate your VAT due.
CHOOSING THE RIGHT SCHEME
The HMRC requires each business to choose a VAT Scheme that gives a fair and reasonable result in the amount of VAT paid. There are many different schemes and special arrangements for certain businesses like caterers, retail pharmacists and florists.
Choosing the right Scheme for your business type can reduce the amount of stress and paperwork plus result in lowering the amount you must pay to VAT. Our company offers assistance and advice to help business owners choose the right VAT scheme and get their accounts set up correctly.
We offer many other services that can help you comply with VAT regulations and avoid an inspection. Please call us to learn more.