What VAT accounting scheme is best for my business?

When your business reaches the taxable turnover threshold (currently £90,000) or expects to reach it within the next 30 days, or if you’re registering voluntarily, selecting the right VAT accounting scheme becomes crucial. The scheme you choose will affect how VAT is calculated, how often you file VAT returns, and how it impacts your cashflow.

In this blog, Yvonne Collings, our VAT Compliance Manager, explains the most commonly used VAT schemes and offers insights to help you avoid common errors.

1. Standard VAT Accounting

The Standard VAT Accounting method is the most commonly used. VAT is calculated based on the tax point – the date the transaction occurs for VAT purposes, which is usually the invoice date. You report income when you issue an invoice and expenses when you receive one.

Key Points:

• You report VAT on income and expenses based on the invoice date, whether payment has been made or not.
• You must account for VAT on any advance payments from customers.
• Cashflow impact: You can claim VAT on purchases when invoiced, but you must pay VAT on sales even if the invoice hasn’t been paid, which can strain cashflow.

2. Cash Accounting Scheme

With the Cash Accounting Scheme, you account for VAT when payment is made rather than when the invoice is issued. VAT is due on sales when you receive payment, and you reclaim VAT on expenses when you pay your suppliers.

Advantages:

• You don’t pay VAT to HMRC until you’ve received payment from customers, improving cashflow, especially if customers pay late.
• However, you can’t reclaim VAT on expenses until you’ve paid your suppliers.

Suitability:

• This scheme benefits businesses with cashflow challenges or those with late-paying customers.
• However, it may not suit businesses that regularly claim VAT refunds, such as start-ups with significant initial expenses.

Eligibility:

• You can use this scheme if your estimated taxable turnover is £1.35 million or less in the next 12 months.
• You must leave the scheme if your taxable turnover exceeds £1.6 million.

3. Annual Accounting Scheme

The Annual Accounting Scheme allows you to file one VAT return per year instead of quarterly. You make payments in equal instalments throughout the year, with a final balancing payment after submitting your VAT return.

Advantages:

• The scheme simplifies administration and improves cashflow management.
• It’s particularly useful for businesses with a stable turnover.

Disadvantages:

• You can only claim refunds once a year, which may affect cashflow if you frequently claim VAT refunds.

Eligibility:

• The scheme is available to businesses with a turnover of £1.35 million or less.
• If your turnover exceeds £1.6 million, you must leave the scheme.

4. Flat Rate Scheme

The Flat Rate Scheme simplifies VAT accounting by letting you pay a fixed percentage of your gross turnover to HMRC, depending on your trade sector.

How it works:

• You still charge customers VAT at the standard rate (usually 20%).
• However, the VAT you owe to HMRC is calculated as a percentage of your total sales, including VAT.
• You can’t reclaim VAT on purchases unless they are capital items costing £2,000 or more.

Common Flat Rate Percentages:

• Business services: 12.0%
• Estate agents: 12.0%
• Accountancy and IT consultancy: 14.5%

The Limited Cost Trader Rule, introduced in 2017, applies a 16.5% rate to businesses that spend less than 2% of their turnover on goods or less than £1,000 per year. In this case, the flat rate scheme might be more expensive than other methods.

Eligibility:

• Your business must have a VAT taxable turnover of £150,000 or less (excluding VAT) in the next 12 months to qualify.
• You must leave the scheme if your turnover exceeds £230,000.

Final Thoughts: Choosing the Right Scheme

Each VAT scheme has its pros and cons, and the right choice depends on your business’s cashflow, turnover, and long-term goals. Carefully reviewing your business’s specifics is crucial, and seeking expert advice can help you avoid costly errors.

If you need help choosing the best VAT scheme for your business, our team at Lewis Brownlee is here to guide you through the process.