VAT Scheme for Small Businesses

Choosing the Right VAT Scheme for Small Business


Introduction to VAT Schemes for Small Business

One of the most important decisions a small business will face, is choosing the right VAT scheme. Making the correct choice will save you valuable time and money while improving the cash flow of your company.

Selecting the right VAT scheme depends upon your specific business and needs. We are here to help, and will provide you with the best advice to help you make the right choice.

When choosing a VAT scheme, you are basically telling the government –

  1. How much VAT you have charged

  2. How much VAT you have paid

VAT Schemes

VAT Schemes


There are different types of VAT Schemes to choose from, depending upon the needs of your business. Some of the most popular VAT schemes are explained below:

Standard VAT Accounting Scheme


This method is the most commonly used process used to calculate VAT. To perform the standard VAT accounting scheme, we keep the detailed VAT record of all purchases and sales. A record can be a manual log book or you can also capture VAT data automatically, with the help of accounting software. You must pay VAT dues quarterly and complete 4 VAT returns a year. If you had a lot of business expenses, VAT refunds are also repayable. You have to pay VAT whether the customer has paid you the same or not.

Annual VAT Accounting Scheme


This is very similar to the standard VAT accounting method except you don’t have to file the returns quarterly and you have an annual VAT reporting & payment deadline. This accounting scheme is for you if your estimated VAT taxable turnover during the tax year is not more than £1.35 million. If you are already using the same scheme, you can continue using it until your estimated VAT taxable turnover exceeds £1.6 million. You only need to complete one VAT return at the end of the year. With the help of an annual accounting VAT scheme, you pay VAT in nine monthly payments or three quarterly installments. These installments are based on the VAT you paid in the previous year. If you paid less VAT, you must make the rest of the payment, but if you overpaid, you claim your refund from HMRC.

The annual VAT scheme helps to reduce your paper work and enables you to manage your cash flow easily.

It is not suitable for businesses that reclaim VAT regularly as there is only a provision of one repayment at the end of the year.

The biggest disadvantage of the annual accounting scheme is, if your turnover decreases, your provisional payments may be higher than the payments under the standard VAT accounting scheme.

VAT Eligibility for Annual VAT Accounting Scheme


You can use the annual accounting scheme if –

  1. You have a VAT registered business

  2. Your estimated annual VAT taxable turnover is £1.35 million or less.

Cash Accounting VAT scheme


Under the cash accounting VAT scheme, you don’t need to pay VAT until you receive payment from your customer. Under this scheme, a business calculates their liability not on the basis on invoices sent & received, but by referring to payments made & received.

If a customer is not paying you the VAT amount, you don’t need to pay VAT on that bad debt as long as you are using this scheme.

There is no need to apply or notify HMRC regarding this scheme. You can use this scheme if your estimated VAT taxable turnover is not more than £1.35 million. You can continue to use the same until your estimated VAT taxable turnover exceeds £1.6 million.

If you are considering using the cash accounting system, you must be aware of the disadvantages too:

  1. You cannot reclaim VAT on your purchases until you have paid your suppliers.

  2. If you reclaim more VAT then you pay on regular basis, it may cause a delay in VAT repayment in comparison to the standard VAT accounting scheme.

  3. If you started trading and using cash accounting scheme together, you will not be able to reclaim VAT on most of the startup expenditure, such as opening stock, tools or machinery, without actually paying for these items.

  4. Before leaving the cash accounting scheme, you will have to pay all the outstanding VAT, including the bad debts.

VAT Eligibility for Cash accounting VAT scheme


You can use the Cash accounting scheme if –

  1. You are a VAT registered business

  2. Your estimated annual VAT taxable turnover is £1.35 million or less.

Flat Rate scheme


You can use the flat rate scheme if you’re VAT taxable turnover is less than £150 million. In this scheme, you pay VAT as a fixed percentage of your VAT inclusive turnover. The actual VAT amount you pay depends upon the type of business you run. Different industries have different flat rates.

The flat rate scheme helps you to reduce the time taken to calculate VAT but you cannot reclaim VAT on purchases. Under this scheme, you still need to show the VAT amount on each sales invoice but you don’t need to record how much VAT you charged or paid on every sale or purchase in your accounts.

You will also get 1% reduction in your flat rate percentage, if you register for the flat rate scheme in the very first year of VAT.

VAT Eligibility for Flat Rate Scheme


You can use the annual accounting scheme if –

  1. You are having a VAT registered business

  2. Your estimated VAT taxable turnover is £150 million or less in a year

Advantages of VAT Schemes

  1. There are less chances of mistakes in your VAT Return

  2. By using the flat rate scheme, you always know what percentage of VAT you must pay to HMRC

  3. You don’t have to work out how much VAT you can or can’t reclaim on purchases.

Get the Right VAT Advice

If you do not have the required time or you are unable to find the VAT solution for yourself and are looking for the right VAT advice. Nomisma can help you find the right accountant for you in your area. Our community of expert accountants can choose the right VAT scheme for you, solve your VAT problems and filing the VAT returns on your behalf. If you would like some guidance in selecting the right accountant for you, you can get in touch with our experts by e-mailing us at info@nomismasolution.co.uk

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