VAT

What is the best VAT scheme for your business?

When registering your business for VAT, there are several options to consider. In some of the cases (if your business is categorized into a specific trade sector), opting for a specified VAT scheme can be mandatory. Otherwise, most of the VAT schemes are structured to be compatible with general businesses you find across the UK. That being said, selecting a VAT scheme for a business is a crucial step forward. Here are some guidelines to consider when you have more than one option to consider when selecting an appropriate VAT scheme.

Standard VAT accounting scheme

This is a very common VAT scheme across the UK. As per this scheme, you are compelled to fill and submit quarterly VAT returns every year. Both VAT due and VAT refund due are subjected to be repaid according to the same structure (quarterly). As per the standard VAT scheme, you are liable to pay VAT on the sales you generated even if the customer hasn’t paid you.

Annual VAT Accounting scheme

You are entitled to utilize Annual VAT accounting scheme only if you can forecast a taxable turnover of £1.35 million for your business within the upcoming tax year. Nevertheless, the businesses that already use Annual VAT accounting scheme can stay on the same scheme as long as the forecasted taxable turnover is less than £1.6 million for the upcoming year. If you chose to use this scheme, you have two installment basis options to pay VAT;

  • Three quarterly installments
  • Monthly installments (9 installments)

The amount you are compelled to pay this year will be determined depending on the previous year’s VAT. However, if you are a new business and have a trading history less than 12 months, the aforesaid installments will be calculated considering an estimated VAT liability. When it comes to VAT returns, however, you are compelled to complete a single VAT return. This should be completed at the end of the respective year. Overpaid or underpaid VAT can be settled accordingly after communicating with the HMRC. This respective scheme can help minimizing the paperwork (as you submit one tax return per year, not four. Even with the less paperwork, you will be maintaining accurate VAT records as per this scheme. However, this scheme is not the best option to consider for the businesses that involve with regular VAT reclaims.

Cash accounting scheme

This can be an effective VAT scheme to help businesses that have slow paying customers. As per the cash accounting scheme, the respective business is required to pay VAT only after receiving the payments from the customers. As per this scheme, you don’t have to pay VAT if your customers don’t pay you at all. The businesses that can estimate a turnover of £1.35 million for the upcoming year are eligible to utilize Cash accounting scheme. Nevertheless, there are a couple of drawbacks associated with this scheme.

  • You are eligible to reclaim VAT only after paying the suppliers.
  • If you start the business with the capital you have (stock, machinery, raw materials etc.), you may not be able to reclaim VAT on those (until you pay).

Flat rate VAT accounting scheme

Flat Rate VAT accounting scheme can be useful for the businesses that don’t exceed a taxable turnover of £150,000. Practically, this is a simplified VAT scheme compared to many other options. As per this VAT scheme, you are liable to pay a fixed VAT (which is a fixed percentage of your taxable turnover). The percentage you must pay will be determined considering the type of the business. This VAT scheme is a substantially simplified method and it requires less paperwork. However, if you chose to go along with Flat Rate VAT accounting scheme, you are not in a position to reclaim VAT on the purchases. Although it is a simplified process, the businesses that use Flat Rate VAT scheme are required to notify the VAT amounts on each sales invoice. Again, however, you don’t need to record VAT on individual sales you make (the percentage is a flat, fixed rate) or even on the individual purchases you make. If you choose to go for Flat Rate scheme for the first VAT year of your business, you are entitled to a 1% reduction in the regular percentage. Flat Rate scheme has relatively less number of rules to adhere. Since you don’t have to determine the VAT on each individual sale you make, your workload is significantly reduced. In addition to that, Flat VAT rate makes it easy for you to have a clear idea about the percentage you have to pay back to the HMRC. Nevertheless, Flat Rate VAT scheme might not be the best solution if your business is involved in purchasing items with standard rates. Also, you should avoid Flat Rate VAT if your business involves in selling zero-rated or tax-exempted items.

VAT Margin Scheme

Under general circumstances, you can charge VAT on the sales you make and reclaim the VAT you pay on the purchases you make on behalf of the business. However, such VAT scheme can be useless if your business is involved in selling specified items such as secondhand goods, collectibles, artistic work etc. (you may not be able to reclaim VAT on purchasing these items). Therefore, upon such circumstances, you have to opt for a special VAT scheme like VAT margin scheme.

As per the VAT margin scheme, VAT will be implied on the margin you keep when selling a product you purchased. In other words, the VAT will be calculated only on the variation between the price you paid when purchasing and the price you sold. According to VAT margin scheme, you are supposed to pay VAT only upon making a profit on a certain deal.

If necessary, you can use another VAT scheme (in most of the cases Standard VAT) for such business and take other sales and purchases into that account.

 

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VAT retail scheme

Recording each individual sale in the accounts can be an intimidating and complicated task particularly if you are involved in a business that sells a large number of inexpensive items to the general public on regular basis (a retail business). In addition to the obvious difficulty, such system may cost unwantedly.

Therefore, instead of using the Standard VAT scheme, retail businesses can consider a suitable retail VAT scheme. A retail VAT scheme might streamline and simplify the process for such businesses. The retail VAT scheme can be selected depending on the nature of the retail business you run. If not, the business can agree to the best option suggested by the HMRC.

Once registered for a retail VAT scheme, the respective business is will have to calculate the total tax revenue generated within a certain period; for instance within 24 hours. Then, the VAT will be calculated depending on the different rates (standard, zero or reduced) applied to each product sold within the respective period. These fractions will be considered as a formula and it will be applied to figure out the respective business’s annual VAT due.

A retail VAT scheme is applicable for businesses that are involved in the retail business. However, the business is liable to issue VAT invoices to the VAT registered customers (upon a request).

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