Special VAT schemes for smaller businesses

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There are three main VAT schemes available to small businesses:

  • The flat rate scheme
  • The annual accounting scheme
  • The cash accounting scheme

The flat rate scheme – This scheme is especially useful for businesses with minimal VAT on business expenses (input tax) to reclaim. For qualifying traders real cash savings can be made. Businesses can only apply to use the flat rate scheme if they expect their annual taxable turnover in the next 12 months to be no more than £150,000, excluding VAT.  Special rules apply to businesses that sell capital assets worth more than £2,000.

Normally the VAT businesses pay to HMRC is the difference between the VAT they charge customers and the VAT paid on purchases. Using the flat rate scheme a business simply pays VAT as a fixed percentage of the total VAT inclusive turnover. The actual percentage depends on the type of business. The amount of VAT paid on business expenses becomes irrelevant.  There is also a 1% bonus for the first year the scheme is used by a business.

Cash Accounting Scheme – Under the cash accounting scheme VAT does not need to be paid over until the customer has paid. If the customer does not pay then the VAT is not payable. This clearly has cash flow benefits for traders who sell on credit.  By contrast, using standard VAT accounting a business pays VAT on their sales whether or not they have been paid by their customer. However users of the scheme can likewise only claim input tax deduction when the suppliers invoice is paid.

A business can enter this scheme provided the estimated VAT taxable turnover for the next VAT year is not more than £1.35 million. It can continue to use the scheme until the VAT taxable turnover exceeds £1.6 million.

Annual Accounting Scheme – The Annual Accounting Scheme is also aimed at smaller businesses. It can either be combined with the flat rate scheme or used by a business which uses standard VAT accounting.  The scheme is open to businesses with a taxable turnover up to £1.35 million. The annual accounting scheme reduces administration time and the associated cost of preparing and submitting quarterly VAT returns. The scheme can also help a business manage cash flow.

Businesses that use the scheme are only required to file one VAT return at the end of each year. They will usually make nine interim VAT payments during the year, based on their estimated total liability for the year, followed by one balancing payment with the return.

If you have any VAT queries please do give us a call.

Lesley Malkin, Audit Partner