Despite HMRC’s best efforts it seems that many small businesses are still not aware of all the different schemes available to help them with their VAT.
Standard VAT accounting
Most businesses operate their VAT on the basis of invoices sent and invoices received, this is the accrual based method.
Common mistakes with this basis include not claiming bad debt relief when an invoice sent remains unpaid after 6 months. Conversely, businesses also often fail to pay over the VAT if the supplier hasn’t been paid for an invoice after 6 months, despite claiming the VAT when the invoice was processed.
Simplified methods include the following:
1. Cash Accounting
This allows the VAT registered business to account for their VAT on a cash basis instead of the standard basis. This is obviously simpler for cash businesses but is also beneficial to businesses where customers take longer to pay than 30 days. To be eligible to use this method you must have a taxable turnover of less than £1.35 million. Once on the scheme you can continue to use this method until your turnover reaches £1.6 million.
You cannot use cash accounting if:
- you are not up-to-date on your VAT Returns and VAT payments;
- you have been convicted of a VAT offence or charged a penalty for VAT evasion in the last year;
- your VAT taxable turnover is over £1.35 million per year.
When you must not use cash accounting
Even if you use cash accounting, you must still account for VAT using standard VAT accounting when you:
- buy or sell goods using lease purchase, hire purchase, conditional sale or credit sale;
- import goods or acquire goods from other EU states;
- remove goods from a Customs warehouse or free zone;
- issue a VAT invoice that isn’t due to be paid for six months or more;
- issue a VAT invoice in advance of providing goods or services.
2. Annual Accounting
With annual accounting you only need to submit one VAT return per year. You pay the VAT liability in nine equal instalments based on the VAT you paid in the previous year. The balance is paid when the VAT return is submitted and you are given two months to prepare and submit the return.
The benefit of this scheme is that it reduces paperwork as you’re only submitting one VAT return per year. It can also benefit cash flow if the turnover is increasing as your monthly payments are based on the previous year until the return is submitted at the end and the balance is paid.
Annual accounting is not suitable for businesses that regularly reclaim VAT as you would only get one repayment at the end of the year.
Another disadvantage of annual accounting is that if your turnover decreases, your interim payments may be higher than under the standard VAT accounting.
The same turnover limits apply to annual accounting as to cash accounting, you must have a taxable turnover of less than £1.35 million. Once on the scheme you can continue to use this method until your turnover reaches £1.6 million.
3. Flat Rate Scheme
This scheme is ideal for small businesses who don’t have a lot of vatable expenditure as it allows the business to pay over VAT based on a flat rate and gives an allowance for vatable purchases.
It is only suitable for small business with a turnover of less than £150,000 but once on the scheme you can remain until the taxable turnover reaches £230,000.
If you are newly VAT registered you can reduce your flat rate by 1 per cent until the day before the first anniversary of your VAT registration.
Using the Flat Rate Scheme you do not have to calculate the VAT on each and every transaction. Instead, you simply pay a flat rate percentage of your turnover as VAT. This gives you the following benefits:
- easier record-keeping – no need to separate out the gross, VAT and net in your accounts;
- fewer rules to follow – no more problems about what VAT you can and cannot reclaim on your purchases;
- peace of mind – less chance of mistakes, so fewer worries;
- certainty – you always know how much of your takings you will need to pay to VAT
For more information on the above schemes, please see the HMRC website.
Of course, there are other schemes that affect particular businesses like the margin scheme, but if you require more information on these please do get in touch and we can advise you on the best VAT scheme for your business.