Fees

VAT Schemes

Why choose Freedom in Numbers to help you with choosing which VAT schemes are right for your business?

Ok, so you know you either want to register for VAT, or you’re obligated to do so, but the next question is ‘which VAT scheme do I choose’?

This is another complex area of VAT and no two answers are the same. It isn’t as simple as choosing the standard way of reporting as it might not be the right option for your business.

Many businesses incorrectly choose to go down the route of least resistance, but this could have a damaging effect on business cash flow.

The good news is that we’re here to help. We will advise you regarding the best scheme for you, leaving you to get back to business.

Understanding VAT, what each scheme means and how it affects your business can be a headache, and costly if mistakes are made.

As a business owner, you’re legally responsible for all aspects of the business, including making sure you adhere to VAT rules, deadlines and paying taxes on time.

When you register for VAT, there are various schemes you can choose from. These schemes impact a few things, including when you calculate your VAT and also how you calculate the VAT you need to pay to the HMRC. 

It’s important that you choose the right scheme(s) for your business. When submitting your VAT application online to HMRC, you are given several options of VAT schemes to register for. It’s important to understand what these mean and when they may be beneficial to you. 

To understand the schemes, and whether you should use any of them, it is first important to understand Standard VAT. This is the usual default option, and we’ll explain how it works. 

Don’t panic, we’re here to help!

What are VAT schemes?

Once you’ve registered for VAT, you’ll need to tell the HMRC how you plan on accounting for the VAT you charge and incur on expenses in the day to day running of your business.

VAT schemes are different ways of recording and reporting VAT in your business, and choosing the right way for your business is important.

The different VAT schemes available are:

Flat rate scheme | Standard VAT scheme | Domestic reverse charge scheme (for Construction) | Annual accounting scheme | Retail and Margin scheme | Limited cost trader scheme

What is the Flat Rate Scheme?

The flat rate VAT accounting scheme is a scheme that can be used to simplify your VAT return reporting.

Under this VAT accounting scheme, you simply calculate the VAT due to HM Revenue & Customs (HMRC) as a percentage of your turnover depending on which industry you operate in.

Each industry has a VAT percentage that takes into account the typical transactions of the industry, and the usual proportion of expenses that cannot have VAT reclaimed on them. The percentages have been set at such a level that your business would be paying the same amount had you carried out the full VAT calculation.

If your VAT purchases are significantly higher than expected for your industry, it might not be the scheme for you, as you would not be able to reclaim the VAT on those expenses, unless they were capital items costing more than £2,000 including VAT.

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.

What is the Domestic Reverse Charge VAT Scheme (for Construction)?

Domestic reverse charge is new VAT legislation brought in for the construction industry from 1st March 2021.

It affects VAT registered constructions businesses who supply or receive construction and building services that are reported under CIS.

It means that the customer (contractor) will be responsible for the VAT due to the HMRC instead of the supplier (subcontractor).

If you do not operate in the trades and construction industry, this VAT scheme will not apply.

What is the Annual Accounting VAT Scheme?

Usually, VAT-registered businesses submit their VAT Returns and payments to HM Revenue and Customs 4 times a year. 

With the Annual Accounting VAT Scheme you make advance VAT payments towards your VAT bill – based on your last return (or estimated if you’re new to VAT), and submit 1 VAT Return a year. 

Under this scheme, you are required to make payments on account towards the annual VAT bill.

What is the Standard VAT Scheme?

By default, when you register for VAT you are set to prepare and submit VAT returns quarterly (every three months). 

This is calculated using VAT included on the invoices you send to your customers, less the VAT you pay on the invoices from your suppliers. So the VAT you pay is the balance on deducting one from the other. 

Under the standard VAT scheme, you can choose to report VAT on an accrual or cash basis.

Accrual basis means you report and pay VAT based on when you invoice your customers, and when you are invoiced by your suppliers, not when money changes hands.

The cash basis means you report and pay VAT based on when you are paid by your customers and when you pay your suppliers. For most businesses, the cash basis is better for cash flow. You must also leave this basis if your VATable turnover (sales) reach £1.35 million in a year.

You don’t need to apply to HMRC to make this change – it is not considered a separate scheme, just an alternative way to calculate the VAT.

What is the Retail and Margin VAT Scheme?

A few retail schemes exist to simplify VAT, and the right scheme for you depends on what your retail turnover (sales) are.

The retail and margin schemes are designed to simplify how retailers calculate the VAT due, and instead on a transactional basis, they can calculate the total value for a particular period.

A Margin Scheme is an optional method of accounting which allows you to calculate VAT on the value you add to the goods you sell, rather than on the full selling price.​

What is the Limited Cost Trader VAT Scheme?

Businesses that are classed as a ‘limited cost trader‘ are businesses that only buys a few goods.

Specifically, a limited cost traders spend on goods including VAT is less than 2% of its VAT inclusive sales for that quarter, or if more than 2% is less than £250 (£1,000 per year).

Businesses using the VAT flat rate scheme who fall within the definition of a ‘limited cost trader’ must pay VAT at the enhanced rate of 16.5%, and not the flat rate according to your trade.

MTD VAT Badge

Why choose us for VAT support?

 

VAT can be incredibly complicated, and costly if mistakes are made. As a business owner, you are legally responsible for all aspects of the business, including adhering to VAT rules, deadlines and paying taxes on time.

At Freedom in Numbers, we’re here to support your business, and take away the stress of the administrative side of business, giving you your freedom back.

We offer a monthly fixed fee service that it tailored to your business and will include all the services you’ll need to get started, including dealing with the HMRC on your behalf!

We will save you time and money.

We’re confident that you’ll love our brilliant customer service and have an excellent experience working with us.

VAT
VAT

Not sure how VAT works, and whether you should register for VAT, or what VAT schemes are and which is right for you?

 

Download our handy guides explaining VAT, and how it works.

Still unsure what everything means?

No problem, we’ve got some FAQ’s that will help answer your questions.

Which VAT scheme is best?

Each VAT scheme has its advantages and disadvantages. We’ve summarised them here.

Standard VAT (Accrual)

✅  – Claim back VAT on purchases before you pay for them.

❌  – Pay VAT on your sales before your customers have paid you.

Standard VAT (Cash)

✅  – Pay VAT to the HMRC only once your customer has paid you.

❌  – Can’t claim back VAT on purchases until you’ve paid for them.

Flat Rate scheme

✅  – Record keeping is simpler & There is a 1% discount on your industry percentage if you register for flat rate VAT in your first year of VAT registration.​

❌  – Can’t claim back VAT on expenses unless they are of a capital nature over £2,000 plus VAT.

Annual accounting scheme

✅  – Regular monthly payments on account.

❌  – No incentive to maintain good up to date records, so you may not know whether your business is making a profit or not before it’s too late.

Retail and margin schemes

✅  – Simplified VAT reporting & if you sell an item for less than you paid for it, you will not have any VAT to account for on the sale.

❌. – Restrictions on goods available to sell under this scheme.

Is the Flat Rate VAT scheme worth it?

The flat rate VAT scheme is suited to businesses that have very little in recoverable VAT on their expenses, but not so little that they would qualify for the limited trader scheme.

Once you know how to complete the online form, accounting for flat rate VAT is a fairly straightforward process since filling in a flat rate VAT return is usually easier than completing a standard rate VAT return.

You will only need to tell HMRC how much you have charged in VAT in total, and there is no need to reconcile your receipts (although we would always recommend that you do keep your records tidy as this makes end of year reporting neat and tidy!)

There is also the opportunity to earn money from the flat rate scheme. If you are a new business, you can benefit from an extra 1% discount in your first year of trading.

The downside to the flat rate scheme is that businesses cannot reclaim VAT on their expenses unless they are capital in nature (equipment, machinery, computers etc) and have a value of £2,000 + VAT or more.

How many VAT schemes are there?

There are six VAT schemes available to businesses, however not all are available or applicable to every business registered for VAT.

The domestic reverse charge VAT scheme is only applicable for construction and trade businesses registered for CIS.

Other restrictions around whether you can join a VAT scheme depend on turnover or industry.

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