Choosing A VAT Scheme
Once you’ve completed all of the VAT registration steps, you’ll receive your VAT certification that proves your business is now registered for VAT. You’ll now need a system for informing HMRC how much VAT you’ve charged (input tax) and how much you’ve paid (output tax).
Regular VAT Accounting Method
The majority of VAT registered businesses keep a record of all sale and purchase transactions. This information can be stored digitally or can be kept in a logbook. There are also a large number of companies that offer accounting software that can help you with this process and can heavily reduce how time-consuming this log keeping can be.
At the end of each quarter, these records are filed in your VAT return and you must pay any VAT that’s due. In some scenarios when you have paid a lot of output tax, you may be able to claim back a significant amount of the VAT you’ve paid and you will receive a VAT refund.
Annual Accounting VAT Scheme
The annual accounting scheme is much like the standard VAT accounting method mentioned above. Although, with this method you do not file quarterly VAT returns, you file your VAT accounts annually on your annual VAT payment deadline. For simplicity and to save time, some businesses choose to file their annual VAT return at the same time as their Corporation Tax. Once your business’s annual VAT return has been filed, you’ll begin making quarterly payments for the VAT that you owe to HMRC.
The benefit of using this VAT method is that it allows you to budget more carefully, which can be very beneficial for smaller businesses. This method is often considered to be better for your business’s cash flow, especially for businesses with an increasing turnover or for those whose trade has a seasonal pattern. In some cases, you may end up over-paying or under-paying your VAT bill, so you’ll sometimes be required to settle any outstanding balance or file for a VAT refund.
Note: Businesses that have an annual turnover of over £1.35m are not able to use the annual accounting scheme.
Flat Rate VAT Scheme
Under the flat rate VAT scheme, you pay a set percentage of your total turnover as VAT. You do so instead of paying the difference between the true VAT that you’ve charged and any VAT you may have paid. Different businesses are required to pay different flat rates of VAT and the rate you pay depends on the type of business you operate. You can find out what flat VAT rate your business will pay on the .gov website.
You will still be required to charge VAT on your invoices, but you won’t have to log the VAT details of every purchase or sale. The Flat Rate VAT Scheme is only available to smaller businesses with an annual turnover of £150,000 or less. With Flat Rate VAT, the only input VAT you are able to claim is on capital expenditure of £2,000 or more, VAT inclusive.
Cash Accounting Scheme
The cash accounting scheme is an alternative VAT calculation method that allows businesses to calculate their VAT due based upon payments the business has made and received. You do this rather than calculating your VAT based upon invoices, sent and received.
By using the cash accounting scheme, you won’t have to pay HMRC VAT on sales that have not yet been completed and paid for by the customer. This can be the case for some businesses and can have a detrimental impact on cash flow.
To successfully use this VAT scheme, your business must keep records of actual payment dates. To be eligible for the cash accounting scheme you must have an estimated taxable turnover of less than £1.35m. As long as your taxable turnover stays below £1.6m you will be allowed to stay in the scheme.
You don’t need to apply to HMRC to use the cash accounting scheme and you don’t have to notify them that you’re using this scheme.
Retail and VAT Margin Schemes
There are multiple different retail VAT schemes that simplify the VAT process. The scheme you use is based on your retail turnover. There’s a scheme for businesses that have a turnover under £1m, between £1m and £130m and for those that have a higher retail turnover. In some cases, smaller businesses can use a retail scheme alongside cash accounting and annual accounting.
You are unable to use a retail scheme alongside a flat rate scheme. Retailers do however have the option of using a flat rate scheme instead. For more niche businesses such as second hand and antiques dealers, there are multiple different VAT margin schemes available.
As there are many legalities surrounding VAT, you may want to seek the advice of an accountant. They will be able to inform you which VAT scheme is best for your business and will be able to clarify any questions you have.