The 4 Different VAT Schemes That You Need to Know

Top-down view of books and teacup

Hey everyone!

It has taken me longer than I expected to get this blog post up. I have been super busy with work and studying, but thankfully the end is in sight.

To keep the ball rolling from my last blog post explaining When to Register for VAT, I thought I would shed some light on four different VAT schemes available for businesses.

1. The Cash Accounting Scheme

This scheme is a popular choice for small businesses as it allows you to manage your cash flow better. With this scheme, you only have to pay VAT when your customer pays you. You can also reclaim VAT on purchases once you have paid your suppliers.

This scheme will benefit you if your customers are slow payers because you won’t have to pay over the VAT to HMRC until you receive payment from your customer.

You also automatically receive bad debt relief as you haven’t received any money, so no VAT has been paid to HMRC. (I know it’s great, right?)

To be eligible for the Cash Accounting Scheme your taxable turnover shouldn’t exceed £1.35m. You also aren’t able to use this scheme with thet Flat Rate Scheme.

2. The Accrual VAT Scheme

The Accrual VAT Scheme is the standard VAT scheme. VAT is accounted for on the date of the sales or purchase invoice and paid over to HMRC quarterly, regardless of when the invoices are paid.

Bad debts are only recognised 6 months after the invoice was due to be paid. For example, if your invoice date to your customer was 1 Jan, but the payment due date was 30 days after the invoice date (so, 31 Jan), it means that if it turns into a bad debt it can only be recognised 6 months from 31 Jan.

3. The Flat Rate VAT Scheme

This scheme is available to businesses with a taxable turnover of less than £150,000.

Using this scheme means you don’t owe HMRC the VAT collected on your sales or offset the actual amount you have paid on purchases. This method applies a fixed percentage to your gross turnover figure (including VAT). The fixed-rate is industry dependent.

With the Flat Rate VAT Scheme, your industry rate is discounted by 1% in your first year of being VAT registered. (which is pretty cool!)

You don’t claim the VAT back on purchases, except for capital purchases over £2,000.

Take a look at HMRC’s guidance on the Flat Rate VAT Scheme.

4. The Annual Accounting VAT Scheme

This scheme allows you to submit one VAT return per year. It also allows you to make advance payments towards your VAT return throughout the year based on the previous year’s VAT return. Once the VAT return has been submitted you will need to make either one final payment or request a refund, depending on if you had under or overpaid when you made the advance payment/s.

This scheme can be combined either with the cash scheme or the flat rate scheme, and you can join this scheme if your VAT taxable turnover is £1.35m or less.

It is always good to chat with an accountant or bookkeeper before making any decisions so they can give you advice on the best VAT scheme for your business.

Love,

Kimmy