How do VAT schemes work?

It is compulsory for businesses to register for VAT if your taxable turnover for the previous 12 months is over £85,000.

There are several VAT schemes that aim to simplify the process for businesses to calculate and record their VAT for HM Revenue and Customs (HMRC).

They are voluntary to join and do not impact the amount of VAT that you will charge.

VAT retail schemes

If you are a retail business and sell multiple low-value items with different VAT liabilities then a VAT retail scheme might be useful for you.

There are three different types of retail schemes and they allow you to calculate VAT once with every VAT return rather than separately for each sale you make.

However, if you use a margin scheme or flat rate scheme, you cannot use a retail scheme.

VAT margin scheme

This scheme lets you calculate VAT by the value you add to the goods you sell rather than based on the total selling price of each item.

For example, it will reduce the amount of VAT you pay if you sell:

-        Antiques

-        Works of art

-        Collectors items

You can only join this scheme if you were unable to claim back VAT when you bought your goods.

VAT cash accounting scheme

If your annual taxable turnover is £1.35 million or less then you can use this scheme.

This scheme means you pay VAT to HMRC when your customer pays you instead of when you invoice them. But you can only reclaim VAT on your purchases once you have paid your suppliers.

VAT annual accounting scheme

Again, you can use this scheme if your taxable turnover is £1.35 million or less.

This lets you complete a single VAT return in the year instead of the typical 4.

You pay VAT in instalments of what you are expected to owe.

You can also choose to make extra payments towards the end-of-year bill.

VAT flat rate scheme

This lets you calculate what you owe in VAT as a percentage of your total turnover.

However, you can only use this if you are a small business and have a taxable turnover of £150,000 or less.

The amount you will pay in VAT will be dependent on the type of business you are.

By joining this scheme, you don’t have to keep detailed records of sales.

You also pay a fixed rate percentage which will be lower than the usual rate but you cannot reclaim VAT on your purchases.

For more advice on VAT schemes, contact us.