VAT is a standardised tax that most businesses and individuals must contribute towards. It stands for Value Added Tax, and as the name suggests, it’s collected any time value is added to a product or service. The VAT paid goes towards Her Majesty’s Revenue & Customs (HMRC) when they sell or hire out goods or services. There are some exceptions, such as sales outside the UK. However, for many businesses, VAT applies to every sale. This blog will give you an insight into everything you need to know about VAT schemes, and how to choose the right scheme for your business.
VAT accounting is a legal obligation
You’re required to register for VAT once you pass the earning threshold. You are then obliged to maintain your VAT accounting records.
HMRC can charge significant fines to businesses that fail to accurately account for VAT. Late filing, late payment and incorrect information can also be heavily penalised. Make sure your returns are accurate and on time.
Choosing a VAT scheme
Once you’ve registered for VAT, you’ll need a system for telling the government:
- how much VAT you’ve charged
- how much VAT you’ve paid
Standard VAT accounting method
The usual method is to keep a detailed VAT record of all purchases and sales. The information is then used to complete a quarterly VAT return. You must file the return with HMRC and pay any VAT that’s due. You may get money back if you had a lot of business expenses and not many sales.
Other VAT accounting methods
There are three alternatives to the standard VAT accounting method:
1. Annual accounting VAT scheme:
This is just like the standard VAT accounting method, except that you don’t fill in quarterly returns. Instead you have an annual VAT reporting and payment deadline. Some businesses keep this the same as their corporation tax filing date, for simplicity. Once you complete the VAT return, you start making quarterly interim payments for the VAT you estimate that you’ll owe. This method allows you to budget more carefully and because payments are spread throughout the year, it’s often better for cash flow. However, you may end up over-paying or under-paying HMRC at times, so you may be required to make a final balance payment or apply for a refund. Businesses with annual turnover above £1.35 million can’t use the annual accounting scheme.
2. Flat rate scheme:
Under this scheme, you simply pay a percentage of your total turnover as VAT. The actual amount you pay depends on the type of business you run – different industries have different flat VAT rates. You’ll still have to charge VAT on your invoices, but you don’t have to account for the VAT details of every purchase or sale. Only smaller businesses, with annual turnover up to £150,000, can use this VAT scheme. Check with HMRC to find out whether yours is eligible.
3. Cash accounting scheme:
With cash accounting, your account for VAT on the date you’re paid as opposed to the date you send the invoice. This can be especially helpful if you have slow payers, since you won’t have to pay VAT before you’ve been paid. However, this option isn’t well suited to businesses that buy a lot of items on credit. You can not reclaim the VAT until payment has been complete. As with the standard VAT accounting method, you still have to complete your returns every quarter.
To get the right VAT advice it’s a good idea to talk to an accountant to help you choose the best VAT scheme for your situation.
How can we help?
Here at Carrington Blake Accountancy we can help you choose the best VAT scheme suited for certain types of businesses. We are experts on giving you advice, and laying out the pros and cons. Contact us today for further information on the accounting services we offer.