Various accounting schemes are available to reduce the amount of administration for smaller businesses. Whichever scheme is used, the net amount of VAT collected is intended to be broadly the same.
Apart from retailers, most small businesses use the cash accounting system
- You account for VAT on the basis of the date cash is received (from sales) or paid out (on purchases) rather than the tax point.
- This avoids the problems that can otherwise arise with late payment of credit sales or bad debts.
- A business can use cash accounting if estimated VATable turnover for the next tax year is no more than £1.35m.
- Once using cash accounting a business can remain in the scheme until VATable turnover reaches £1.6m.
- Businesses using the scheme from the outset should reclaim VAT on pre-registration purchases on the first VAT return otherwise claims may be blocked.
With the annual accounting scheme, only one VAT return is filed each year
- Nine monthly or three quarterly interim VAT payments are made, based on an estimate of the total annual VAT bill. A balancing payment is due when the annual confirmation is submitted.
- Businesses with an estimated VATable turnover of up to £1.35m may apply to use this system and can remain in the scheme until turnover reaches £1.6m.
- Any business under the threshold can use the scheme from the date of VAT registration.
A flat-rate scheme is available for small businesses
- Individual purchase transactions are ignored and input VAT cannot normally be reclaimed, unless it is a single capital item costing more than £2,000.
- Instead, VAT is paid to HMRC as a fixed percentage of your VAT-inclusive turnover according to the category of business, ranging from 4% to 14.5%. There is a 1% reduction for businesses in their first year of VAT registration.
- The exception is if the cost of direct goods is less than either 2% of VAT inclusive turnover or £1,000 pa. The business is then classed as a “limited cost trader” with a flat rate of 16.5%. This will add to the VAT bill for those in this category so it is vital to only include “relevant goods” in deciding eligibility to stay on a lower rate.
- VAT invoices are still issued showing the normal VAT rates.
- The scheme can be used if estimated VATable turnover in the next 12 months is up to £150,000. Once in the scheme, you can stay until total business income exceeds £230,000.