VAT accounting schemes

Calculating VAT using a VAT accounting scheme

VAT accounting schemes can make your life easier, simplifying your VAT accounting and in some cases improve your cash flow. If your taxable turnover of standard and reduced-rated supplies is below £1.35m (excluding VAT), or if you are involved in retail or selling second-hand goods, a VAT accounting scheme could suit you

Flat rate VAT accounting scheme

The flat rate VAT accounting scheme simplifies your VAT returns. Under this VAT accounting scheme, you simply calculate the VAT due to HM Revenue & Customs (HMRC) as a percentage of your turnover. This is instead of paying the difference between the actual VAT you have charged on sales and the VAT you've paid out on purchases. The only input VAT you can claim is on the purchase of a single capital item of expenditure costing more than £2,000 including VAT. You list this VAT separately on your VAT return in box 4.

The flat rate used depends on your industry and has been set at a level where you should end up paying HMRC virtually the same amount of VAT as if you had carried out the full VAT calculation. If your VAT purchases are significantly higher then expected for your industry it might not be the scheme for you. There is a 1% discount on the flat rate VAT if you use the scheme during your first year of VAT registration.

You are only eligible for this VAT accounting scheme if your estimated taxable turnover in the next year will be no more than £150,000. Once you are using the scheme, you can continue to do so until your total business income exceeds £230,000.

Limited cost trader

Businesses using the VAT flat rate scheme who fall within the definition of “limited cost trader” must pay VAT at the enhanced rate of 16.5%. The rule applies if the cost of direct goods and services is less than 2% of turnover or less than £1,000 per year (even if costs are more than 2%). There are restrictions on the goods and services you can include for this calculation when deciding if you are eligible to stay on a lower rate. Many business expenses are excluded such as capital expenditure, professional services and vehicle running costs.

VAT cash accounting scheme

Normally, VAT returns are based on the tax point date (usually the same as the VAT invoice date) for your sales and purchases. This may mean you can end up having to pay HMRC the VAT due on sales that your customers have not yet paid for.

The VAT cash accounting scheme instead bases the return on payment dates, both for purchases and sales. You will need to ensure your VAT records include a record of actual payment dates.

You are only eligible for the VAT cash accounting scheme if your estimated taxable turnover is no more than £1.35m, and can then stay in the scheme as long as it remains below £1.6m.

Annual accounting scheme

The annual accounting scheme allows you to pay VAT on account, in either nine monthly or three quarterly payments. You then complete a single, annual VAT return which is used to work out any balance owed by you or due from HMRC.

Again, this simplifies your VAT paperwork. You are only eligible for the scheme if your estimated taxable turnover is no more than £1.35m, and can then stay in the scheme as long as it remains below £1.6m.

If eligible, you may be able to combine the annual accounting scheme with the flat rate VAT and VAT cash accounting schemes.

Retail and VAT margin schemes

Various retail schemes exist to simplify VAT. The right scheme for you depends on whether your retail turnover (excluding VAT) is below £1m, between £1m and £130m or higher.

Smaller businesses may be able to use a retail scheme with cash accounting and annual accounting. You cannot combine a retail scheme with the flat rate VAT scheme, but retailers can choose to use the flat rate scheme instead.

Separately, there are VAT margin schemes for businesses that deal in second-hand goods, art or similar goods, as well as a special tour operators’ margin scheme.

As with flat rate VAT and VAT cash accounting, you may want to take advice to see which accounting schemes would best suit your circumstances.

Reverse charge VAT scheme

Since 1 March 2021 a new reverse charge VAT scheme for the construction industry has applied.

This is to tackle widespread "Missing Trader" fraud. The reverse charge scheme makes the customer, instead of the supplier, responsible for accounting for VAT on providing labour.

The scheme doesn't apply to the final business or domestic customer but does apply to sub-contractors who supply workers to a main contractor.

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