HMRC have a number of VAT schemes which help small businesses with cash flow and reducing admin. Here we examine each in turn and set out the advantages, conditions for joining, workings and conditions for leaving.
The flat rate VAT accounting scheme simplifies your VAT returns. Under this VAT accounting scheme, you simply calculate the VAT due to HM Revenue & Customs (HMRC) as a percentage of your VAT inclusive turnover. This is instead of paying the difference between the actual VAT you have charged on sales and the VAT you've paid out on purchases. The only input VAT you can claim is on the purchase of a single capital item of expenditure costing more than £2,000 including VAT. You list this VAT separately on your VAT return in box 4 (you will need to ask your accountant to assist with this as an adjustment will be needed - accounting software will not pick this up for you).
The flat rate used depends on your industry and has been set at a level where you should end up paying HMRC virtually the same amount of VAT as if you had carried out the full VAT calculation. If your VAT purchases are significantly higher then expected for your industry it might not be the scheme for you. There is a 1% discount on the flat rate percentage if you use the scheme during your first year of VAT registration.
The advantages include the fact that quarterly returns are much simpler to complete, meaning you are less likely to make errors on a return. You are only eligible for this VAT accounting scheme if your estimated taxable turnover in the next year will be no more than £150,000. Furthermore, in the previous 12 months you must not have been convicted of a VAT offence/penalty for dishonesty. Once you are using the scheme, you can continue to do so until your total business income exceeds £230,000.
This information is correct at time of writing, please refer to the government website for any updates. https://www.gov.uk/vat-flat-rate-scheme
Cash Accounting Scheme
Normally, VAT returns are based on the tax point date (usually the same as the VAT invoice date) for your sales and purchases. This may mean you can end up having to pay HMRC the VAT due on sales that your customers have not yet paid for.
The VAT cash accounting scheme instead bases the return on payment dates, both for purchases and sales. You will need to ensure your VAT records include a record of actual payment dates (most accounting software will do this automatically). This scheme helps cash flow (as you only pay VAT once it has been collected from your customer) and you are able to get automatic bad debt relief (if your customer doesn't pay you won't pay the VAT included on their invoice).
In order to join this scheme, your estimated taxable turnover must be no more than £1.35m, with all VAT returns up to date and paid. In addition, you must not have been convicted of a VAT offence in the past year. In order to stay in the scheme, your turnover must remain below £1.6m.
This information is correct at time of writing, please refer to the government website for any updates. https://www.gov.uk/vat-cash-accounting-scheme
Annual Accounting Scheme
The annual accounting scheme allows you to pay VAT on account, in either nine monthly or three quarterly payments. VAT is paid by direct debit and each instalment is 10% of the VAT estimate. You then complete a single, annual VAT return which is used to work out any balance owed by you or due from HMRC.
This simplifies your VAT paperwork, meaning penalties are less likely and cash flow is more certain. You are only eligible for the scheme if your estimated taxable turnover is no more than £1.35m, and you are not a member of a VAT group registration. You can then stay in the scheme as long as the turnover remains below £1.6m, or your company doesn't become insolvent/ceases to trade.
This information is correct at time of writing, please refer to the government website for any updates. https://www.gov.uk/vat-annual-accounting-scheme