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Different VAT Schemes and Their Benefits: Annual Accounting Scheme, Cash Accounting Scheme and Flat Rate Scheme

Abul Nurujjaman, 



VAT is value added tax which can be viewed as a tax on consumer spending and goods imported into the United Kingdom (UK). It can also be examined as a consumption tax based on value added to goods and services. 

 

The amount of VAT that the user pays is the cost of the product minus any of the costs of materials used in the product that have already been taxed. Businesses are expected to register for VAT with HMRC if the total value of everything they sell that isn t exempt from tax exceeds £83,000. There are thresholds put in place by HMRC for businesses registering for VAT or joining a VAT accounting scheme from 1 April 2016.

 


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VAT Thresholds:

Situation

      Threshold

Vat registration

Higher than £83,000

Registration for distance selling into the UK

Higher than £70,000

Deregistration threshold                        

Lower than £81,000

Completing simplified EC Sales List

£106,500 or less and supplies to EU countries of £11,000 or less

Note: more on VAT thresholds can be found on our VAT registration and Deregistration blog

 

There are 6 different VAT schemes each one is specific to a particularly industry and a range of general business problems. 

 

These schemes are: 

1) Annual Accounting Scheme

2) Flat Rate scheme

3) Cash Accounting scheme

4) VAT schemes for retailers

5) Tour Operators Margin scheme 

6) Margin schemes for second-hand goods, art, antiques and collectables 

 

Annual Accounting Scheme 


The VAT Annual Accounting Scheme business using this scheme where you pay once a year and the deadline for payment is 2 months from the last day of your accounting period. This payment is based on the payment from prior year. If it’s a company that has been trading for less than a year then the payment will be estimated based on the predicted future tax liability. If a company has over paid a refund can be claimed by the organisation from HMRC. However, if a business knowingly under pays meaning, that their VAT liability for that period is higher than the estimated payment by HMRC they are liable to prosecution.  

Entering the scheme: 

 

To join the scheme the businesses must:

a) Be VAT registered

b) Have an estimated VAT taxable turnover of £1.35 million or less in the next year, which makes it an option an advantage for small business owners.   

Leaving the scheme 


Businesses can leave the scheme if:

a) They’re no longer eligible to be in it

b) Their VAT taxable turnover, or estimated amount, should be more than £1.6 million at the end of the annual accounting year

 

 

Companies that have left the scheme and decide to re-join, will have to wait year before doing so. 

 

Benefits

Disadvantages

Decreases work load because businesses only have to complete one yearly return.

This does not suit businesses that reclaim VAT on a regular basis, has they can only receive repayment once a year.

Allows businesses to able to better control their cash flow.

Although this does not take away the requirement for business to keep all necessary VAT records and accounts.

 

If a business’s revenue reduces, quarterly payments may prove higher than that of the standard VAT scheme.

 

 

 

Cash Accounting Scheme

 

Typically with standard VAT accounting scheme, VAT is paid when an invoice has been issued. 

However, with the cash accounting scheme businesses pay VAT on their sales when their customers have paid or can reclaim VAT on their purchases when their supplier has been paid. This scheme is particularly suitable for retailers. 

 

Entering the scheme


To join the scheme the businesses must:

a) Be VAT registered

b) Have an estimated VAT taxable turnover of £1.35 million or less in the next year, which makes it an option an advantage for retailers.

  

Leaving the scheme 


Businesses can leave the scheme if:

a) They’re no longer eligible to be in it

b) Their VAT taxable turnover, or estimated amount, should be more than £1.6 million at the end of the annual accounting year  

Businesses do not have to notify HMRC if they wish to leave the Cash Accounting scheme. However, businesses are required to pay any outstanding VAT for which they are entitled an extra 6 months to pay. 

 

 

Benefits

Disadvantages

A great advantage when managing cash flow, particularly in businesses where customers are slow to pay.

This scheme will not be suitable for businesses that reclaim VAT on a regular basis.

Extremely beneficial if a business has bad debts (debts that cannot be recovered).

This scheme will also not be suitable for businesses that routinely buy goods and services on credit.

Compared to standard VAT accounting business don’t have to pay HMRC if their customers have not been yet.

 

 

Flat Rate Scheme

 

The flat rate scheme was created to help small companies decrease the time they spend accounting for VAT. VAT does not need to be calculated on every transaction if the Flat Rate scheme is being used; rather businesses will pay a "flat rate" percentage of their revenue as VAT. 

 

The percentage is less than the standard VAT accounting because it takes into consideration the fact that most businesses will not be reclaiming their VAT on their purchases. There is also a variety of flat rate tax available to businesses so they can pick the one that most benefits them, however, it depends on what sector they trade in or operate. 

 

Entering the scheme

 

To join the scheme the businesses must:

a) Be VAT registered

b) Have an estimated VAT taxable income turnover of £150,000 or less, excluding VAT, in the next year

  

Leaving the scheme 

 

Businesses can leave the scheme if:

a) They’re no longer eligible to be in it

b) The anniversary of the business s using this scheme, their revenue or estimated amount, in the last year was higher than £230,000, including VAT 

c) They estimate that their total revenue in the next 30 days alone is going to be higher than £230,000 including VAT

 


There is a year (12 months) waiting period to re-join the scheme if you choose to do so.

 

Benefits

Disadvantages

Easier for businesses to keep their records

However a negative of this will be that businesses cannot  reclaim VAT on their purchases

This allows the business owner to have more time doing other things in the business

Businesses that buy a lot of products and services from VAT registered companies could end up paying more VAT.

There are less rule for business to follow in regards to VAT

Businesses should beware of making zero-rated or exempt sales, because they could end up paying more VAT due to the fact that the flat rate percentage on sales is still being applied. This is regardless of if the company is charging VAT of those sales.   

 

VAT scheme for retailers


Under the standard VAT accounting scheme, if a business is VAT registered they have to record the VAT paid on every sale. 

 

However with the VAT retail scheme, businesses can calculate the value of their VAT taxable income or sales for a particular period. Companies can use this scheme for supplies they acquire thorough retail, however companies must still issue VAT invoices to any of their VAT registered companies that wants one. 

 

Different Schemes

Special arrangements are given to:

Point of sale scheme

Florist

Appointment scheme

Caterers

Direct calculation scheme

Chemists

 

Regardless of which scheme a business chooses, they have to in HMRC s viewpoint, provide a reasonable and fair outcome in the sum of VAT paid.

 

 

Margin scheme

 

Typically with standard VAT businesses charge VAT on their sales and purchases are reclaim through VAT. Margin scheme benefits businesses that sell second- hand products such as antiques. 

 

This scheme allows a business to be able to account for VAT exclusively on the difference between cost paid for the product and price it will be sold for which is the businesses margin. A business will not pay any VAT if they do not make a profit and there will no VAT to reclaim on the product they have bought. 

 

 

Business can still use standard VAT accounting for some purchases and sales like expenses. Auctioneers and global accounting have particular margin scheme.


Disclaimer: The information provided in this blog is brought to you by Taj Accountants. As you are reading this blog of your own free will, any information taken from this blog is at your risk. Before using the information provided to apply, to your business seek professional or legal advice.Taj accountants will not be liable for any damages.

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