3 Special VAT Accounting Schemes: Which VAT Scheme Is Right For Your Business?

Value Added Tax (VAT) can be a complex and time-consuming aspect of running a business. Thankfully, HMRC offers a range of special schemes to make VAT accounting more manageable. In this blog post, we'll delve into three of these schemes: the Flat Rate Scheme, the Cash Accounting Scheme, and the Annual Accounting Scheme, explaining their eligibility criteria, advantages, and disadvantages. Before we go into the special schemes, we will cover the standard VAT scheme.

The Standard VAT Scheme

Eligibility

• Register when your taxable turnover exceeds the VAT registration threshold, which is £85,000.

• If your turnover falls below the deregistration threshold, which is £83,000, you have the option to voluntarily deregister from the scheme.

Payment Frequency:

• Typically, businesses registered under the standard VAT scheme submit VAT returns to HMRC on a quarterly basis. These returns should include both the VAT you've charged on sales (output tax) and the VAT you've paid on purchases (input tax).

The standard VAT scheme is the default method for accounting and paying VAT. When considering registration, deregistration, and payment schedules, it's vital to monitor your taxable turnover and adhere to HMRC's updated regulations. Compliance with the standard VAT scheme necessitates meticulous record-keeping and timely payments, ensuring that your business operates smoothly within the established VAT framework.

The Flat Rate Scheme

Eligibility:

• Designed for small businesses with an annual turnover of £150,000 or less.

• You must deregister if your annual turnover exceeds £230,000.

• Your VAT-registered business must not have used the Flat Rate Scheme in the last 12 months.

Advantages:

1. Simplified VAT Accounting: Under this scheme, you pay a fixed percentage of your gross turnover as VAT. This means you don't need to keep detailed records of VAT on every sale and purchase.

2. Cash Flow Benefits: Many businesses end up paying less VAT than they would under the standard scheme, which can positively impact cash flow.

3. Less Administrative Burden: Reduced paperwork and simpler calculations can save time and resources.

Disadvantages:

1. Limited Reclaim: You can't claim back VAT on your purchases except for certain capital assets over £2,000.

2. Not Suitable for All Businesses: If your business regularly reclaims more VAT on expenses than it charges on sales, this scheme might not be the best fit.

3. Potential Costs: Some businesses might end up paying more VAT than with the standard scheme if their expenses are high.

The Cash Accounting Scheme

Eligibility:

• Suitable for businesses with an annual taxable turnover of up to £1.35 million.

• You must deregister once your annual turnover exceeds £1.6 million.

• Your business must not have used the Cash Accounting Scheme in the last 24 months.

Advantages:

1. Improved Cash Flow: VAT is only accounted for when you receive payment from your customers or make payments to suppliers. This helps businesses with late-paying customers.

2. Simplified Accounting: Reduced complexity in VAT accounting, making it easier to manage.

Disadvantages:

1. Delayed VAT Reclaim: You can't reclaim VAT on your expenses until you pay your supplier. This could delay your VAT recovery.

2. Increased Administrative Work: Managing VAT based on payment dates can add complexity to your accounting processes.

3. Not Suitable for All Businesses: Businesses with regular early payments might not benefit as much from this scheme.

The Annual Accounting Scheme

Eligibility:

• Suitable for businesses with an expected VAT taxable turnover of £1.35 million or less.

• You must deregister from this scheme if you annual turnover exceeds £1.6 million.

Advantages:

1. Reduced Administrative Burden: You submit one VAT return per year, which simplifies VAT accounting and reduces paperwork.

2. Predictable Payments: You make regular, fixed payments, which can help with budgeting and financial planning.

3. Steady Cash Flow: It can help smooth out your cash flow, as you pay VAT in smaller, regular instalments.

Disadvantages:

1. Infrequent VAT Refunds: The scheme would not suit your business if you regularly reclaim VAT because you’ll only be able to get 1 refund a year (when you submit the VAT Return).

2. Limited Real-Time Visibility: The annual scheme offers fewer chances for real-time visibility into your VAT liabilities, particularly if revenue is different from last years, which the current year regular payments are based upon.

In conclusion, these UK VAT accounting special schemes are designed to make life easier for small and medium-sized businesses. While they offer simplicity and benefits like improved cash flow and reduced administrative work, they may not suit every business model. Carefully consider your specific circumstances, consult with an accountant or tax advisor, and weigh the pros and cons before deciding which scheme is right for you. Remember, the eligibility criteria and benefits may change over time, so stay updated with HM Revenue and Customs (HMRC) guidelines.

This information was valid on 17th October 2023.