VAT accounting schemes

VAT accounting schemes can make your life easier, simplifying your VAT accounting and in some cases improve your cashflow. If your taxable turnover of standard and reduced-rated supplies is below £1.35m (excluding VAT), or if you are involved in retail or selling second-hand goods, a VAT accounting scheme could suit you.

Flat rate VAT accounting scheme

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 as a percentage of your turnover rather than paying the difference between the actual VAT you have charged and paid.

The flat rate used depends on your industry, but should normally end up in the amount of VAT paid to HMRC being roughly the same as if you carried out the full VAT calculation. There is a 1% discount on the flat rate VAT if you use the scheme during your first year of VAT registration.

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. Once you are using the scheme, you can continue to do so until your total business income exceeds £230,000.

VAT 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 VAT due on sales 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.

You are only eligible for the VAT cash accounting scheme if your estimated taxable turnover is no more than £1.35m, and can then stay in the scheme as long as it remains below £1.6m.

Annual accounting scheme

The annual accounting scheme allows you to pay VAT on account, in either nine monthly or three quarterly payments. You complete a single, annual VAT return which is used to work out any balance owed by you or due from HMRC.

Again, this simplifies your VAT paperwork. You are only eligible for the scheme if your estimated taxable turnover is no more than £1.35m, and can then stay in the scheme as long as it remains below £1.6m.

You may be able to combine the annual accounting scheme with the flat rate VAT and VAT cash accounting schemes if you are eligible.

Retail and VAT margin schemes

Various retail schemes simplify VAT. The right scheme for you depends on whether your retail turnover (excluding VAT) is below £1m, between £1m and £130m or higher.

Smaller businesses may be able to use a retail scheme with cash accounting and annual accounting. You cannot combine a retail scheme with the flat rate VAT scheme, but retailers can choose to use the flat rate scheme instead.

Separately, there are VAT margin schemes for businesses that deal in second-hand goods, art or similar goods, as well as a special tour operators’ margin scheme.

As with flat rate VAT and VAT cash accounting, you may want to take advice to see which accounting schemes would best suit your circumstances.