VAT Accounting Schemes

Continuing our series looking at VAT, in this article we’re looking at different VAT schemes.  Many business owners don’t know that HMRC offers several different VAT accounting schemes that businesses can choose from. 

Each scheme has its own advantages and disadvantages, depending on the size and nature of the business. We will discuss four of the most common VAT accounting schemes: the standard VAT accounting scheme, the cash accounting scheme, the flat rate scheme, and the annual accounting scheme. We will explain how each scheme works, and explore the benefits and drawbacks of each option, to help businesses choose the most suitable scheme for their needs.

Standard VAT Accounting Scheme 

The standard VAT accounting scheme is the most common method of accounting for VAT. Under this scheme, businesses are required to pay the VAT on their sales to HMRC, and they can reclaim the VAT they have paid on their purchases. 

In practice, this means that businesses must keep accurate records of their sales and purchases, and they must submit regular VAT returns to HMRC. These returns show how much VAT the business owes to HMRC, as well as how much VAT the business can reclaim. 

The standard scheme is the default scheme for businesses that are not eligible for any of the other VAT accounting schemes. 

An advantage of the standard scheme is that businesses can reclaim VAT on their purchases, which can help to reduce their costs. However, businesses must account for VAT on all of their sales, even if the customer has not paid yet. This can create cash flow issues, as the business must pay the VAT to HMRC before receiving payment from the customer.

Cash Accounting Scheme 

This method allows businesses to account for VAT on the basis of payments received and made, rather than on the basis of invoices issued and received. Under this scheme, businesses only have to account for VAT on their sales and purchases when they are paid or received. 

This can help to improve cash flow for businesses, particularly for those that have long payment terms or that operate in industries where late payment is common.  

Spinning that on its head means that the cash accounting scheme is that it may not be suitable for businesses that have a large number of purchases or that regularly reclaim VAT on their purchases because the business can only reclaim VAT on their purchases when they have paid their suppliers, which may cause cash flow issues.

Flat Rate VAT Accounting Scheme 

The Flat Rate VAT Accounting Scheme is a simplified method of accounting for VAT that is available to businesses with an annual turnover of £150,000 or less. Under this scheme, businesses pay a fixed percentage of their turnover as VAT to HMRC. This fixed percentage varies depending on the type of business, but it is usually lower than the standard VAT rate. 

The flat rate scheme is easier to administer than the standard scheme. Businesses only need to calculate their VAT liability as a percentage of their turnover. This can save time and reduce the administrative burden on the business. 

The flat rate scheme can be more profitable for businesses that have a low cost base. This is because the fixed percentage that the business pays takes into account the fact that they are unlikely to have much VAT to reclaim on their purchases. However, it is worth noting that businesses cannot reclaim VAT on their purchases under the flat rate scheme, except for certain capital assets over £2,000. 

Conversely, some businesses may end up paying more VAT than they would under the standard scheme, particularly if they have a high cost base.

Annual Accounting Scheme 

With most of these schemes, business owners submit a VAT return quarterly and pay what they owe on the same basis.  The Annual Accounting Scheme for VAT is a method of accounting that allows businesses to make advance payments of their VAT liability throughout the year.  

Under this scheme, businesses make either nine or twelve monthly payments, and then submit one annual VAT return and make a balancing payment or receive a refund if necessary. 

A big advantage of the annual accounting scheme is that it can help to simplify VAT accounting for businesses, particularly those that have a relatively stable turnover throughout the year. This is because the business does not have to submit quarterly VAT returns, which can save time and reduce the administrative burden. They submit just one return for the whole year. 

This can help to improve cash flow for businesses. The business makes regular, fixed payments throughout the year, rather than having to make large, variable payments based on their actual VAT liability. The annual accounting scheme can also help businesses to avoid penalties for late payment or late submission of VAT returns. 

Sometimes, the annual accounting scheme is not right for a business because they may end up paying more VAT than they would under the standard scheme. This is because the advance payments are based on the previous year's VAT liability, rather than the current year's liability. Therefore, if the business's turnover increases significantly during the year, they may end up paying more VAT than they would have if they had used the standard scheme. 

VAT accounting schemes are designed to simplify the process of accounting for VAT and can help businesses to manage their cash flow and reduce their administrative burden. The standard VAT accounting scheme is the most common method of accounting for VAT, but that doesn’t mean that it’s the best scheme for every business.  It’s worth carefully considering, with a professional, which scheme is right for your business.

Nothing on this page is intended to be or should be construed or taken as accountancy, investment, tax or any other kind of advice. We recommend individuals and companies seek professional advice on their circumstances and matters.