What are the different VAT schemes? 

VAT can be a headache, but VAT schemes make it easier to manage. Whether you’re a freelancer, a small business or a growing company, there are different schemes to handle your VAT. Some help with cash flow, others make calculations a breeze – it’s all about finding the right fit for your needs. 🤝 Let’s break it down.

What is standard VAT accounting?

Standard VAT accounting is the default way of handling VAT. You charge VAT on sales, reclaim it on business purchases, and file a VAT return every quarter. Simple enough, right? Well, there’s one little catch – you owe VAT to HMRC as soon as you issue an invoice, even if your customer hasn’t actually paid you yet. 👀

This method works well for businesses with steady cash flow and reliable customers who always pay on time (lucky you!) It’s also useful for businesses that regularly reclaim VAT on stock, materials, or equipment. 

But if your cash flow is more of a “fingers crossed” situation, then one of the many VAT schemes may be a sweet relief! 😌

What are the different VAT schemes?

There’s no one-size-fits-all with VAT. Different VAT schemes come with different rules, so it’s important to find the one that works best for your business. Take your pick!

1. Flat Rate Scheme: pay a fixed percentage of your turnover instead of tracking VAT on every sale and purchase.
2. VAT Cash Accounting Scheme: only pay VAT when you actually receive payment from customers. 💰
3. VAT Margin Scheme: for the cool kids dealing in second-hand goods, antiques, art, or collectibles. 
4. VAT Annual Accounting Scheme: make fixed quarterly payments and only file one VAT return a year.
5. Retail Schemes: simplified VAT calculations based on average VAT rates for different products. 🛍️

Each of these schemes offers unique benefits depending on your business needs. Keep reading for the details on each one!

What is the flat rate scheme?

The VAT flat rate scheme is perfect if you want to keep things simple. ✨ Instead of tracking VAT on each sale and purchase, you pay a fixed percentage of your turnover. 

To be eligible for the flat rate scheme, your business must have a taxable turnover of £150,000 or less (excluding VAT). If your business fits the bill, it can be a major time-saver and a real boost to your admin efficiency. 

The details: 

• Industry rates vary: different industries have different flat rate percentages, so make sure you know which one applies to you.
• No VAT reclaim: sorry, no refunds on most purchases! This includes stock, equipment, and everyday expenses, unless those assets cost over £2,000.

While the scheme simplifies VAT reporting, it’s important to weigh up whether the fixed rate works in your favour based on your business expenses and industry rate.

What is the VAT cash accounting scheme?

The VAT cash accounting scheme lets you pay VAT only when you’ve actually received payment from customers, instead of when you issue invoices – a lifeline for businesses that struggle with slow-paying customers. 🙌 

To qualify for the scheme, your taxable turnover must be £1.35 million or less (excluding VAT). It’s perfect for smaller businesses or anyone who doesn’t want VAT to sneak up on them when cash flow is tight. 

Businesses that reclaim more VAT than they charge (typically those with high VAT-rated expenses but lower VAT-charging sales) may find this scheme less beneficial. This often applies to businesses that purchase a lot of VAT-inclusive goods but sell products or services that are zero-rated or exempt. ❌

Under standard VAT accounting, these businesses can reclaim VAT as soon as they receive an invoice for their expenses. But under the VAT cash accounting scheme, they must wait until they’ve actually paid for those expenses to reclaim the VAT. This delay can impact cash flow, especially for businesses that rely on quick refunds. 

What is the VAT margin scheme?

Got second-hand goods, antiques, or cool collectibles? Then the VAT margin scheme might be your new best friend. 👋 With this scheme, you only pay VAT on the margin (the difference between what you bought something for and what you sold it for). No need to pay VAT on the wholesale price. 

What to know: 

• Pay VAT only on the margin: this can reduce your VAT burden, especially when buying and selling unique items.
• No VAT reclaim on purchases: you can’t claim VAT back on the items you buy, whether it’s stock or business expenses. So, it’s a bit of a trade-off. ⚖️

It’s a great option for businesses dealing in second-hand goods, but it’s important to factor in the VAT you won’t be able to reclaim. 

Other VAT schemes

VAT annual accounting scheme

The VAT annual accounting scheme is one of the VAT schemes that reduces admin by allowing businesses to make fixed quarterly payments and file just one VAT return annually. It’s ideal for businesses with a turnover of £1.35 million or less (excluding VAT).

VAT retail schemes

Retail businesses, rejoice! VAT retail schemes simplify VAT calculations by allowing you to use average VAT rates for different products, meaning you won’t have to calculate VAT for every individual sale. 

HMRC provides various retail scheme options based on your business type: 

• Point of Sale Scheme: you identify and record the VAT at the time of sale.
• Apportionment Scheme: you buy goods for resale.
• Direct Calculation Scheme: you make a small proportion of sales at one VAT rate and the majority at another.

If your turnover excluding VAT exceeds £130 million, you’ll need to agree on a bespoke retail scheme with HMRC. 

Choosing the right VAT scheme

Choosing the right VAT scheme can make a big difference to how easy it is to manage your VAT. Whether you want to simplify your admin, better manage your cash flow, or just make life easier, there’s a scheme for you. From the VAT flat rate scheme to the VAT margin scheme, each option comes with its own set of benefits.

Consider your business size, cash flow, and the type of goods or services you sell to find the best match. And remember – as your business grows, don’t forget to reassess your VAT scheme. Your future self will thank you! 🌱