BackToBasics
Recapping VAT schemes
Nick Craggs breaks down the three basic VAT schemes for businesses and how they work.
Words Nick Craggs, First Intuition
In the UK, businesses with a taxable turnover above the VAT threshold must register for VAT and comply with its regulations. As the current VAT turnover threshold is £85,000, most business will have sales above this and will have to submit VAT returns. However, to alleviate some of the administrative and potential extra costs that may be incurred, HMRC offer various schemes for businesses.
One of the most common schemes is Cash-Based VAT. As opposed to the standard invoiced based VAT, the business only pays VAT over to HMRC when they have received the cash from their customer. This helps a company manage its cashflow, as opposed to invoiced-based VAT, where a company pays over the VAT on an invoice they have sent to a customer.
One downside is the business cannot claim the VAT back on any of its purchases until you pay your suppliers. Businesses with an annual taxable turnover of up to £1.35m can use Cash-Based VAT.
Reducing balance
The Annual Accounting Scheme is designed to simplify the VAT reporting and payment process for businesses by allowing them to make one annual VAT return and payment, rather than quarterly. Although it is an annual scheme, businesses are required to make interim quarterly payments based on an estimated liability. These quarterly payments help distribute the financial burden throughout the year. At the end of the financial year, businesses submit a single annual VAT return, reconciling their actual liability against the quarterly payments made.
Flat rate scheme
The last VAT scheme to be covered is very different as it is not necessary to account for and record all the VAT on the business’ purchases. The company applies a fixed percentage to its gross turnover, including VAT, and pay that amount to HMRC. HMRC offers a list of percentages for different business types, for example, if you are an accountancy or bookkeeping business you would pay over 14.5% of your gross sales to HMRC. The flat rate scheme significantly reduces the administrative burden, as businesses do not need to track VAT input and output separately.
However, while there is a long list of different percentages to use for different industries, the emphasis is on you to choose the correct percentage. There are two other things to consider. Firstly, in the first year of being registered, you get a discount of 1% on what you pay over. The other is if you are a limited cost business. If your purchases are less than 2% of your gross sales, or lower than £1,000 in total for the year, you count as a limited cost business. As a limited cost business, it does not matter which industry you operate in, you will pay a percentage of 16.5% of your gross sales as VAT. Businesses with a taxable turnover of £150,000 or less (excluding VAT) can apply.
