Following on from my previous article regarding when you need to register for VAT, it seemed a good opportunity to consider the different types of VAT schemes (there are more than one!).
It’s important to choose the right scheme for your business and the information below is just a summary, so make sure you talk to your accountant before making a final decision.
The different types of VAT schemes available are
- Standard Scheme
- Cash Accounting Scheme
- Flat Rate Scheme
- Annual Scheme
- Retail Scheme
- Margin Scheme
Under the standard scheme, VAT returns are calculated by totaling all you output VAT (VAT on sales) and deducting any input VAT (VAT on your costs). The balancing figure is the amount due to HMRC, or due to you if you are in a refund position.
The tax point date, which is the period in which the VAT must be accounted for, is established from the date of the invoice.
For example, if you are preparing a March quarter VAT return, you include any output and input VAT on invoices dated between 1 January and 31 March.
Cash Accounting Scheme
The cash accounting scheme works in the same way as the standard scheme except that the tax point date is the day payment is made rather than the invoice date. This can help with a business’s cash flow.
For example, say you raised a sales invoice dated 31 March for £10,000 plus £2,000 VAT, and your customer doesn’t pay you until 31 May.
Under the standard scheme, the £2,000 VAT must be included on your March quarter VAT return and HMRC would collect the amount due on around 10 May. This is before the customer pay you.
Under the cash scheme, the £2,000 wouldn’t need to be included until the June quarter VAT return for which payment to HMRC wouldn’t be until 10th August, by which time you have received the funds from your customer.
The downside to the cash accounting scheme is that you can’t reclaim input VAT until you have actually paid your supplies.
You can only use the cash accounting scheme if your estimated turnover in the next 12 months is less than £1.35 million and must leave the scheme if your turnover exceeds £1.6 million.
Flat Rate Scheme
The purpose of the flat rate scheme is to simplify the VAT calculation process.
Instead of calculating your output VAT and deducting your input VAT to calculate your VAT liability, under the flat rate scheme you simply apply a percentage to your total taxable turnover.
The percentage depends on the type of business, so an accountant would use a different percentage from a builder.
Although the flat rate scheme simplifies the VAT process, you could be financially worse off as the VAT you pay could be higher than under the normal method.
You can only use the flat rate scheme if your estimated turnover in the next 12 months is less than £150,000 and you must leave the scheme if your turnover exceeds £230,000.
Normally VAT returns are submitted quarterly. Under the flat rate scheme, you make estimated advanced payments to HMRC and then submit a VAT return once a year. This results in you needing to make a final payment to balance the account, or apply for a refund if you have overpaid.
The same turnover limits apply as with the cash accounting scheme.
The VAT retail scheme can also simplify the process of calculating your VAT. Instead of calculating the VAT on each sale you do it once for each VAT return.
There are three different standard retail schemes.
- Point of Sale Scheme – you identify and record the VAT at the time of sale.
- Apportionment Scheme – you buy goods for resale.
- Direct Calculation Scheme – you make a small proportion of sales at one VAT rate and the majority at another rate.
Under the margin scheme, you calculate the VAT due on the difference between the cost you paid for an item and what you sold it for.
You can choose to use a margin scheme when you sell:
- second-hand goods
- works of art
- collectors’ items