Your VAT Scheme Options

Retail Business Owner | Flat Rate Scheme

Businesses with a turnover above £85,000 must register for VAT. VAT schemes are there to simplify the process of VAT; however, there are several schemes that you can choose from, including the popular flat rate scheme. Here is our quick guide to help you understand VAT and choose the right scheme for your business.

Registering for VAT

First things first, once your turnover exceeds £85,000 you have 30 days to register for VAT. If your turnover is below the threshold you can choose to voluntary register to get the following advantages:

  • To reclaim VAT which the business pays on business supplies
  • To appear bigger, which can help small businesses wanting to appear larger than they are

 Disadvantages of Registering for VAT

  • You will have to add VAT to your prices, which will inevitably increase them. However, competitors will need to do the same.
  • You will have more VAT requirements; although, these are being simplified with the introduction of Making Tax Digital.

What VAT Scheme Should I Use?

Flat Rate Scheme

The Flat Rate Scheme calculates your VAT payments as a fixed percentage of your annual turnover. You then pay a fixed rate of VAT to HMRC and keep the difference between what you charge your customers and what you pay to HMRC.

The VAT flat rate you pay depends on your business type. Visit Gov.uk to work out your flat rate. There is a 1% discount on the flat rate if you use the scheme during your first year of VAT registration

Eligibility
You must be VAT registered and have a turnover of £150,000 or less (excluding VAT). Once you start using the scheme, you can continue to do so until your total business income exceeds £230,000.

Cash Accounting Scheme

When submitting VAT to HMRC you normally report the difference between all your sales and purchase invoices and pay any money to HMRC – even if the invoices haven’t been paid.

With cash accounting, businesses account for VAT when they receive a payment, not the date stated on the invoice. The advantage is that you do not pay HMRC VAT for sales that have not been paid yet.

Cash accounting is useful for businesses with slow payers or those that struggle with their cash flow. Although, it does mean that you cannot reclaim VAT on any purchases made until you have paid your suppliers.

As with the standard VAT accounting method, you must complete your returns every quarter.

Eligibility
You must be VAT registered and have an estimated VAT taxable turnover of £1.35million or less.

You cannot use this scheme if you are already using the VAT Flat Rate Scheme.

Annual Accounting Scheme

The Annual Accounting Scheme, as the name suggests, requires you to only make one VAT return a year, as opposed to every quarter.

As part of this process you make quarterly payments to HMRC based on your last VAT return. At the end of the year, when you submit your VAT return, you then make a final payment (the difference between your advance payments and actual VAT bill) or you apply for a refund (if you have overpaid).

This scheme simplifies the VAT process and helps with budgeting and cash flow as you know exactly what you owe every quarter. However, it is not recommended for businesses that regularly reclaim VAT as you only receive one refund a year.

Eligibility
You must be VAT registered and have an estimated VAT taxable turnover of £1.35million or less.

Retail and VAT Margin Schemes

These schemes are designed for retail businesses to simplify the VAT process.

VAT Retail Schemes save you time by allowing you to calculate VAT for each return, rather than for each sale. There are three schemes depending on your turnover and business:

  • Point of Sale Scheme – You can use this scheme if you use an electronic system that records VAT applied for goods sold at the time of sale.
  • Apportionment Scheme – you can use this scheme if you buy goods for resale. However, to use the scheme your turnover cannot be more than £1million
  • Direct Calculation Scheme – You can use this scheme if you make sales using different VAT rates. However, as with the Apportionment Scheme, your turnover cannot exceed £1million
  • Direct Calculation Retail Schemes – If your turnover exceeds £130million or you are unable to account for VAT using one of the above schemes you can agree a bespoke retail scheme.

The VAT Margin Scheme is designed for those that deal in second-hand goods, art or antiques and collector’s items. This scheme applies tax to the difference between what you pay for an item and what you sold it for. Businesses under this scheme then pay VAT at 16.67% on the difference. You can start this scheme at any time, but must keep the correct records.

Next Steps

VAT is relatively straightforward, but there are some pitfalls and it is important you pick the right VAT scheme for your business. Raffingers’ team is on hand to answer any questions you may have, contact Partner and VAT Specialist, Lee Manning.

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