The UK tax system has multiple VAT schemes designed to help businesses of various sizes and functions. These are here to help simplify the VAT accounting process and potentially save your business money.  

It is essential to understand and select the right schemes, though, as choosing poorly could mean more complex returns and missed savings.

This blog will outline the various VAT schemes available in the UK.

The VAT Flat Rate Scheme

The flat rate scheme for VAT, as the name suggests, is about simplifying the VAT process for smaller businesses, but businesses will still need to track the VAT on every transaction.

What is the VAT Flat Rate?

This gets quite complicated so, as an alternative, the Flat Rate VAT scheme means smaller businesses can pay a flat percentage of gross turnover to HMRC in lieu of calculated VAT.

The rate of this depends on the industry your business operates within, and can range from 4% to 16.5%. You can see the full list of flat rates on the government’s website. The business keeps the difference between what is charged to customers and paid to HMRC.

Crucially, under the Flat Rate Scheme, you will not be able to reclaim VAT on purchases (besides certain capital assets).

Who can use the flat rate scheme?

Businesses can only access the Flat Rate VAT scheme if they have annual taxable turnover of £150,000 or less (excluding VAT).

Businesses in their first VAT-registered year get a 1% discount on their Flat Rate.

VAT Flat Rate Scheme example

• If you bill a customer £2,000 for printing services, the addition of VAT at the standard rate of 20% would make a total of £2,400.

• The Flat Rate of VAT for printing is 8.5%.

• Your Flat Rate payment would therefore be 8.5% of the VAT inclusive turnover (£2,400)

• This means the Flat Rate payment to HMRC would be 8.5% of £2,400, or £204.

Pros and cons of the Flat Rate VAT scheme

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In short, the Flat Rate Scheme or VAT is a great option for small businesses and sole traders who want to simplify accounting and admin. However, businesses might end up paying more VAT than they would under the standard scheme if they make a lot of VAT-taxable purchases.

Leaving the flat rate scheme

Businesses enrolled in the flat rate VAT scheme must leave under certain conditions:

• If turnover exceeds (or is expected to exceed) £230,000 (including exempt income).

• You cease trading or deregister for VAT

• You become associated with another business

• You start buying or selling goods in Northern Ireland (in certain cases)

You can also leave the flat rate scheme voluntarily if it is no longer financially beneficial or you wish to switch to a different VAT scheme.

The VAT Annual Accounting Scheme

The Annual Accounting VAT scheme enables submission of a single annual VAT return instead of four quarterly returns.

Eligibility

You can use the scheme if:

• Your business is VAT registered

• Your estimated VAT taxable turnover is £1.35 million or less in the next 12 months

A business in the scheme will make advance payments throughout the year based on its last VAT return. At the end of the year, a single VAT return is filed, and the business will either pay the difference or receive a refund.

Pros and cons of the Annual Accounting VAT scheme

The scheme offers valuable predictability and saves a lot of time. Business owners will not need to deal with quarterly deadlines and can simplify their budgeting with evenly spread payments.

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The Cash Accounting VAT Scheme

The amount of VAT that businesses pay to HMRC is usually the difference between sales invoices and purchase invoices. Businesses need to report on these figures in VAT returns and pay HMRC even if the invoices haven’t been paid yet!

If a business has a delicate cash flow due to slow paying customers or unpredictable income, the Cash Accounting VAT scheme can be extremely helpful.

• Under the Cash Accounting Scheme, you will only pay VAT when the customer has paid you.

• Conversely, you can only reclaim VAT on purchases when you have paid the supplier.

In effect, the scheme aligns your VAT payments with real income, which is good news for budgeting and forecasting.

Eligibility

Like the VAT Annual Accounting scheme, you can use the Cash Accounting scheme if:

• Your business is VAT registered

• Your estimated VAT taxable turnover is £1.35 million or less in the next 12 months

Pros and cons of the Cash Accounting VAT scheme

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The VAT Margin Scheme

The VAT margin scheme allows certain business to only pay VAT on the profit margin instead of the full sale amount. The scheme tends to be used by sellers of second-hand goods, antiques or collectors’ items.

The scheme is particularly helpful for avoiding double taxation on items that have already been taxed. However, it is important to note that VAT cannot be reclaimed on purchases.

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VAT Retail Schemes

Businesses that sell goods to the public usually have to calculate VAT on each individual sale. They do this by either deducting it from VAT-inclusive prices, or by adding it on to VAT-exclusive ones.

There are three VAT retail schemes available to simplify this process:

• The Point of Sale Scheme enables businesses to calculate and record VAT at the time each sale is made.

• The Apportionment Scheme enables businesses to calculate VAT based on the proportion of goods sold at each rate of VAT.

• The Direct Calculation Scheme estimates VAT by applying ratios from a sample of sales, which is useful for businesses where most sales fall under one VAT rate and only a few under others.

These schemes can be combined with both the Cash Accounting and Annual Accounting schemes listed earlier in this blog, but they cannot be combined with the Flat Rate scheme.

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VAT affects every business and is one of the most widely paid taxes, despite being one of the most complicated. If you are unsure which, if any, of these schemes may be suitable for your business, reach out to our team today and we will be more than happy to help you figure out the best options.