VAT accounting schemes: the basics
In contrast to standard VAT accounting, there are several alternative ways you can account for VAT that could save you time and money.
Some of these VAT accounting schemes have been designed for specific trade sectors. Others have been designed to deal with more general business issues. Some of the schemes can be used together. This is an overview of each of the schemes and you should discuss with your accountant which is available to you and which is the most appropriate.
Annual Accounting Scheme
Using the Annual Accounting Scheme, you pay VAT on account throughout the year in nine monthly or three quarterly installments. These installments are based on the VAT you paid in the previous year. If you have been trading for less than a year, the installments are based on an estimate of your VAT liability.
You only need to complete one VAT Return at the end of the year. If you have not paid enough VAT on account you make a balancing payment to HM Revenue & Customs (HMRC). If you have overpaid, you claim a refund from HMRC.
Annual accounting can reduce your paperwork because you only need to complete one annual return instead of four quarterly returns. It can also make it easier to manage your cash flow. However, it does not remove the requirement to keep all required VAT records and accounts.
Annual accounting is not suitable for businesses that regularly reclaim VAT as you would only get one repayment at the end of the year.
Another disadvantage of annual accounting is that if your turnover decreases, your interim payments may be higher than under the standard VAT accounting.
Cash Accounting Scheme
Usually VAT is payable when an invoice is issued. In contrast, using the Cash Accounting Scheme, you do not need to pay VAT until your customer has paid you. But you also cannot reclaim VAT on your purchases until you have paid for them.
Cash accounting can be beneficial for your cash flow especially if your customers are slow to pay. It is even more useful if you have bad debts. Under standard accounting for VAT, you have to pay the VAT on the debt even if you never receive the payment from your customer (although it could be claimed later). Using the Cash Accounting Scheme, you do not pay the VAT if your customer never pays you.
The Cash Accounting Scheme may not be for you if you regularly reclaim more VAT than you pay, or if you buy a lot of goods and services on credit.
Flat Rate Scheme
The Flat Rate Scheme was introduced 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 turnover as VAT. This gives you the following benefits:
- easier record-keeping - no need to separate out the gross, VAT and net in your accounts
- more time for you - less work doing the books so you can get on with running your business
- fewer rules to follow - no more problems about what VAT you can and cannot reclaim on your purchases
- peace of mind - less chance of mistakes, so fewer worries
- certainty - you always know how much of your takings you will need to pay to HMRC
The percentage is less than the standard VAT rate because it takes into account the fact that you are not reclaiming VAT on your purchases. There is a range of flat rate percentages - the one you use depends on your trade sector.
Although the Flat Rate Scheme can reduce your paperwork, one downside is that you cannot reclaim VAT on the majority of your purchases. If you buy a lot of goods and services from VAT-registered business, you could end up paying more VAT. Also, if you make a lot of zero-rated or exempt sales, you could end up paying more VAT because you will still pay the flat rate percentage on your turnover for those sales, even though you are not charging VAT on those sales.
VAT schemes for retailers
If you sell to the general public, especially high quantities of relatively inexpensive items, it can be difficult, time-consuming and costly to record the VAT on every sale in your accounts. There are several VAT accounting schemes that retailers can use instead of accounting for VAT in the standard way. These can help simplify your retail VAT accounting.
There are a number of different standard retail schemes, or depending on your business, you may be able to agree a bespoke VAT retail scheme with HMRC, if your turnover is over certain limits.
The standard retail schemes are:
- apportionment schemes
- direct calculation schemes
- the point of sale scheme
These schemes are suitable for most retail businesses.
There are special arrangements and rules for:
- caterers and catering
- chemists (retail pharmacists)
Margin schemes for second-hand goods, art, antiques, collectibles
Normally you charge VAT on your sales, and reclaim VAT on your purchases. However, if you buy or sell second-hand goods, works of art, antiques or collectibles you may be able to use a margin scheme. These schemes enable you to account for VAT only on the difference between the price you paid for an item and the price at which you sell it - your margin. There is no VAT to reclaim on the item you buy, and you won't pay any VAT if you don't make a profit on a deal. You can still use normal VAT accounting for other sales and purchases such as overheads.
There are special margin schemes for auctioneers and global accounting.
Tour Operators' Margin Scheme
Tour operators often buy goods and services from businesses in foreign countries, and cannot often reclaim their input tax. The Tour Operators' Margin Scheme solves this problem by allowing tour operators to calculate the VAT on just the value that they add.
The content and advice is for information only. Last updated 09.11.2010.
For up to date information and advice, based on your specific circumstances, please contact us.
We cannot be held responsible for actions taken with reference to the content contained on this website.