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VAT accounting schemes: A quick-fire guide

29th Apr 2022
Brought to you by
myfirmsapp

Myriad Associates helps businesses maximise tax reliefs.

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VAT isn’t a particularly glamorous subject. And of course, it’s a topic that as an accounting professional you could recite in your sleep.

Having said that, with several different VAT schemes available (and all of them tweaked regularly), it’s well worth a quick refresh.

Standard accounting

This is most commonly used type. Your client includes VAT on their VAT return based on the date they submitted their invoice to their customer. VAT can also be claimed back based on either the date their company received payment, or on their supplier's invoice.

The major plus point of standard accounting is that VAT can be claimed back on purchases as soon as they’re invoiced. Clients may however be put off by the fact they must pay VAT on all their sales invoices, even before their invoice has been settled by the customer has paid you. Cash flow issues may therefore be a factor here.

Generally though, if your client tends to get paid instantly standard VAT accounting may suit their business model best.

VAT cash accounting

Varies slightly from Standard VAT accounting in that VAT is paid based on the invoice payment date, both for sales and purchases. As it’s not based on the issue date of the invoice, VAT is only payable on payment of the invoice.

This arrangement may appeal to any of your clients who are prioritising cashflow, as they don’t have to fork out for VAT on an invoice that hasn’t yet been paid.

To be eligible for the scheme, your client must expect their annual taxable turnover to be under £1.35 million. They must also join at the beginning of a new VAT accounting period.

You should flag up to clients that if they’re behind with their VAT Returns or have VAT payments outstanding, they’re not eligible to use VAT cash accounting. This also applies if they have been convicted of any VAT offence - including VAT tax evasion - in the last year.

See latest information on VAT cash accounting on the Gov.uk website.

Flat rate VAT accounting

Another popular one, particularly with small businesses as it’s fairly straight-forward. It’s simply a case of paying a fixed percentage of the company’s annual turnover, so each year the VAT amount due will be roughly the same.

Flat rate VAT accounting also means that the business is able to retain the difference between the amount of VAT paid to HMRC and the amount paid by customers. But where it differs from other VAT schemes is that VAT is not typically reclaimable on purchases.

To use this scheme, your client must expect a business turnover of £150,000 or less (excluding VAT). A 1% discount also applies on the flat rate VAT if your client uses the scheme during the first year of them being VAT registered.

Annual accounting scheme

This type of VAT scheme means that VAT is paid over either nine monthly or three quarterly instalments. Designed to be flexible and simple, it can also be combined with the flat rate and VAT cash accounting schemes if desired.

Annual VAT accounting simply involves submitting a VAT return to HMRC every year and paying the outstanding amount. Companies can only stay in the scheme however if their turnover remains at £1.6 million or below. The scheme can also be used if the estimated taxable turnover is under £1.35 million.

Retail schemes

Various different retail VAT schemes exist and the right one for your client’s business depends on whether their retail turnover (excluding VAT) is under £1 million, between £1 million and £130 million or over.

If your client is in retail, they will need to choose a scheme depending on the type of retail they’re in. For instance, a travel agency will use one type of scheme whereas an art dealer will use a different one. It’s worth familiarising yourself with the different retail schemes that exist.

SMEs particularly may wish to combine a retail VAT scheme with a cash accounting and annual accounting scheme. However, such schemes cannot be combined with the flat rate VAT scheme.

VAT margin schemes

VAT margin schemes are particularly suited to businesses such as second-hand or vintage clothing retailers, those in art, antiques and collectables and similar. This set up works well for such businesses because instead of paying VAT based on the item’s selling price, instead the tax is based on the difference between what the company bought the item for and how much it sold it for.

Business owners planning to join a VAT margin scheme must maintain records of qualifying goods for reporting on their VAT return. Such records should include individual item invoices in addition to a stock book.

Certain types of businesses are also excluded from using VAT margin schemes. Investment in gold is one example, as well as precious stones or metals and anything purchased for which VAT was charged. Certain conditions also apply around second-hand vehicles, auctions, pawnbrokers and horses/ponies.

Reverse charge VAT scheme

On the 1st March 2021 a new VAT scheme aimed specifically at the construction industry was launched - the “VAT reverse charge”.

Essentially, the concept is it prevents traders disappearing off the face of the earth having not paid their VAT bill. The mechanics of it mean that the customer, rather than the supplier, is responsible for the VAT on labour charges. However, domestic customers aren’t affected. This is about contractors and subcontractors.

If any of your clients are in the construction industry in any capacity, read up on the VAT for the construction industry here.

This article was brought to you by Myriad Associates

The Myriad Associates team works only in the field of R&D tax relief, grants and funding. This means we’re experts in our field, and partnering your practice with us make sense. To find out more about partnering with us, call 0207 118 6045 or send us a message and we’ll call you back. Don’t let your clients miss out on the R&D funding they rightly deserve; even the smallest claims can easily run into thousands.