Understanding VAT Schemes for Small Businesses

For VAT-registered businesses, understanding the VAT schemes available can help simplify accounting processes and improve cash flow management. Here are some of the key schemes that businesses can consider:

Standard VAT Accounting:  It’s important to first understand the default position, which is that businesses submit monthly or quarterly VAT returns, paying over any VAT due on their sales, less qualifying VAT incurred on purchases.  The tax point is largely determined by the invoice date.  

VAT Flat Rate Scheme: is designed to simplify VAT reporting for small businesses with an annual taxable turnover under £150,000.   Businesses pay a fixed percentage of their total turnover to HMRC, which varies by industry.  There is a 1% discount on the applicable VAT rate in the first 12 months of registration, which can often make this option more attractive.  However, while this scheme simplifies record-keeping, businesses cannot reclaim VAT on most purchases, so it won’t be right for everyone.   

VAT Cash Accounting Scheme:  is beneficial for businesses that trade on credit terms, or don’t receive regular payments from customers. Under this scheme, businesses only pay VAT to HMRC when they receive payment from their customers, rather than when they issue invoices, and only reclaim VAT on supplies once they have been paid.  To be eligible, a business’s annual taxable turnover must not exceed £1.35 million.

VAT Annual Accounting Scheme:  allows businesses to submit just one VAT return per year.  Businesses make advance payments based on their previous year’s VAT liability, with a final balancing payment due at the end of the year. This scheme is available to businesses with an annual taxable turnover below £1.35m.  In some cases, it can simplify the administrative burden of quarterly returns and help with cash flow planning, but care should be taken to ensure you don’t get an unexpected bill at the end of the year.

VAT Margin Scheme: is intended for businesses that deal in second-hand goods, works of art and antiques. Instead of paying VAT on the full selling price, businesses pay VAT on the difference (margin) between the purchase price and the selling price. Choosing the right VAT scheme depends on various factors, including the size of the business, the nature of transactions, and its cash flow so businesses should evaluate their options carefully, but use of the right scheme can help streamline VAT processes and improve cash flow management, whilst ensuring compliance with HMRC regulations.