VAT does not have to be an office headache with mountains of paperwork and sums. By understanding what the different VAT accounting schemes are you can decide which is best for your business, saving time, money and stress as you go.
Standard accounting (this is the default option for almost all VAT-registered companies) — you account for VAT on the invoice date, irrespective of when payment has actually been received. Receiving VAT bills from HMRC on unpaid invoices (which can be very damaging to cash flow for businesses with long payment terms). But it’s simple and effective for companies with good customers who pay on time. For Accountants Bristol, visit https://chippendaleandclark.com/accountants-near-me/bristol/
Cash Accounting Scheme
This scheme is ideal for smaller businesses who are concerned about cash flow and need only to account for VAT when the payment gets credited or made. If it takes three months for a customer to pay you, then you won’t owe VAT under cash accounting until that money drops into your bank account. You can also VAT reclaim on your purchases only after you have paid for them. This scheme is open to businesses with an annual taxable turnover of less than £1.35 million
Annual Accounting is designed for businesses that like the idea of regular fixed monthly/quarterly VAT payments, and also allows you to make 9 months or 3 quarterly interim payments based on last year’s liability followed by a balancing payment along with your annual return. Paperwork is cut drastically too, an aggregate of four VAT returns in all quarters gets converted into a one time per annum effort.
Flat Rate Scheme
This scheme is intended to simplify the calculation of VAT due, simply allowing you to pay a set-percentage on your turnover (gross) instead of the ill-fated job with piecing together each transaction as it should be taxed – Also known as MTD. It will be a percentage — this varies between business sectors and you get to keep anything over what you charge customers from HMRC. But you can’t reclaim the VAT on purchases (apart from capital assets over £2,000). It is suitable for service businesses with low input costs and annual taxable turnover less than £150,000.
Retail Schemes
These are for retailers who deal with the general public and they provide different means of calculating VAT where it is impractical to issue a separate VAT invoice in respect of each sale.
Making the Right Choice
Remember – choose your scheme based on business type, turnover size, cash flow timing and administrative capability to claim back. A lot of the schemes can be grouped together and it is usually possible to switch between them with appropriate notice given to HMRC.
Using the Right VAT Scheme can make your accounts easier and help with managing cash flow.
