VAT schemes : what you need to know
In the UK, there are different ways in which VAT-registered businesses can calculate and report the value-added tax (VAT) payments on the goods and services they buy and sell. The scheme under which they do so depends on the type of business and their annual turnover. VAT schemes are designed to simplify the way some business submit their VAT returns. Let Mooncard guide you through the basics of choosing the right VAT scheme.
5 VAT schemes
It is not compulsory to join a VAT scheme and joining a scheme does not alter the amount of VAT that is due. The idea is to simplify the way in which that VAT is reported, collected, paid and reclaimed. There are five main types of VAT schemes: the VAT Flat Rate scheme, the VAT Cash Accounting scheme, the VAT Annual Accounting scheme, the VAT Margin scheme, and the VAT Retail scheme.
Choosing the right VAT scheme for you can be complicated, as certain schemes only apply up to a certain business turnover threshold, while others apply to specific sectors of activity.
VAT Flat Rate scheme
The amount of VAT that a business pays or reclaims from HMRC is the difference between the VAT charged to customers and the VAT paid out on expenditure. With the Flat Rate scheme, businesses pay a fixed rate of VAT depending on their sector of activity. The difference between what the business charges to its clients and what it has paid to HMRC then determines how much they keep or pay.
Businesses on the Flat Rate scheme cannot reclaim VAT on their purchases (with certain exceptions).
To join the Flat Rate scheme, the business’s turnover must be £150,000 or less (excluding VAT), and they must apply to HMRC first.
The VAT Flat Rate scheme might not be right for every business, and it is important to seek out expert advice to find out if it is the right choice for you.
VAT Cash Accounting scheme
The amount of VAT a business pays to HMRC is the difference between the amount a business collects in VAT from customers and the amount it pays out on purchases. This figure has to be reported and paid to HMRC regardless of whether the business’s invoices have been paid.
The Cash Accounting scheme allows businesses to only pay VAT when their customers have paid them. That means it is a good option for businesses whose customers are often slow to settle their bills. It also allows them to reclaim the VAT they pay on purchases when they have paid their suppliers. That means, however, that it might not be right for businesses that buy a lot of goods on credit.
Only businesses with an annual turnover of less than £1.35 million are eligible to join the VAT Cash Accounting scheme. There are other limitations on eligibility for this scheme, which are set out in more detail on the HMRC website.
VAT Annual Accounting scheme
Usually, businesses which are VAT-registered have to submit quarterly VAT returns to HMRC. The Annual Accounting scheme allows businesses to make advance VAT payments towards their VAT bill based on their previous return and to submit only one VAT return per year.
Although they can make quarterly payments towards their VAT bill, businesses which use the Annual Accounting scheme only get one VAT refund per year. This means that it might not be suitable for all businesses.
The forms for joining the VAT Annual Accounting scheme are available on the HMRC website.
VAT Margin schemes
VAT margin schemes apply to specific sectors of activity, namely the sale of second-hand items, works of art, goods which are considered collector’s items, and antiques.
Under the VAT Margin schemes, businesses are taxed on the difference between the price they paid for the item and the price they sold the item for. The difference between the two is taxed at a special rate of 16.67% which applies under the VAT Margin schemes.
There is no need to register to join this VAT scheme, but as with all VAT returns, meticulous records must be kept and VAT returns must be electronically submitted within the standard deadlines.
It should be noted that exceptions to this scheme exist. It cannot be used for the sale of second-hand vehicles, horses and ponies, houseboats and caravans, items that have been pawned or high-volume low-price sales. Different rules also apply to auctioneers and agents as well as to sales involving the import and export of goods to countries outside the UK. As always, it is best to check with an expert before deciding on the right VAT scheme for your business.
VAT Retail schemes
There are three VAT Retail schemes which are open to businesses that sell goods. These businesses must calculate how much VAT they need to record. The VAT Retail schemes are designed to make it simpler to calculate this amount. Rather than calculating the VAT on every single sale, VAT is calculated once with each VAT return.
The three VAT Retail schemes are as follows:
- Point of Sale scheme: the business identifies and records the VAT at the time of sale, usually using an electronic cash register. They then add up the VAT for all the sales and report this amount to HMRC.
- Apportionment scheme: this applies to businesses which buy goods for resale. The business has to calculate the total value of the items which it has purchased for the purposes of reselling, divide the total by the relevant VAT rate and multiply by the total sales, divided by 6 for 20% rated goods and by 21 for 5% rated goods.
- Direct Calculation scheme: this applies when a business makes a minority of its sales using one VAT rate and the majority of its sales at another rate. The business calculates the expected selling prices for their goods and adds this up, then deducts this from their total sales to reach the total VAT due.
It should be noted that retailers with a turnover of more than £130 must contact HMRC to create a personalised retail scheme. There are also separate VAT rules for caterers, pharmacists and florists.
As with many aspects of running a business, there is no one-size-fits-all VAT scheme. Choosing the right one will depend on the size of your business, the type of transactions you regularly make, and the sector of activity. Making the right choice is essential if you are to comply with VAT regulations and make sure returns are submitted and refunds are received in a timely manner.
Tax advice is available online and HMRC publishes a wide range of relevant information on its website. Mooncard can make tracking your sales, purchases and VAT easier.
Get in touch for more information and a no-strings-attached demonstration about how Mooncard can help your business.