Understanding VAT: Types of Schemes

Value Added Tax (VAT) can be straightforward once you grasp the basics. However, there are many areas where mistakes can easily occur, leading to penalties. This article summarises key notes on the types of VAT Schemes available:

• Standard VAT Accounting Scheme: Most businesses use the standard VAT accounting scheme, this is where VAT is calculated based on the difference between output VAT (VAT on sales) minus any allowable input VAT (VAT on purchases). In most cases this results in an amount of VAT that would be payable to HMRC. Where the input VAT exceeds the output VAT a refund is received back from HMRC. The VAT is reported either monthly, quarterly (most common) or annually (see below for further detail on the annual scheme).
• Cash Accounting Scheme: Small businesses can use the cash accounting scheme where VAT returns are based on payments made and money received, regardless of tax points. Usually, any business with an estimated taxable turnover up to £1.35 million can apply. There are some exceptions which would mean the business cannot report VAT under this scheme. If the business is using the flat rate scheme then the Flat Rate Scheme has its own cash-based turnover method. If VAT returns or payments have been made late, or a VAT offence has been made by the business this will also limit their ability to join the scheme. Switching schemes from invoice basis to cash basis also requires adjustments on the transitional VAT return and there are other rules to consider therefore it is recommended to seek advice from an accountant prior to making this transition.
• Flat-Rate Scheme: This scheme allows small firms to calculate the net VAT they owe by applying a flat-rate percentage to their gross turnover. To join, the estimated VATable turnover (excluding VAT) must be no more than £150,000. The amount of VAT percentage applied varies depending on the type of industry and business.
• Annual Accounting Scheme: Businesses can submit one VAT return per year and make interim payments throughout the year, with a balancing payment with the annual return. Any business with an estimated VAT taxable turnover under the threshold of £1.35 million can apply to use the scheme from the date of VAT registration. If it’s expected that the business will have an estimated VAT taxable turnover of £1.6 million in the next 12 months from any given period the business must then leave the scheme.
• VAT Margin scheme: Enables businesses to pay VAT on value they add to the goods as opposed to accounting for VAT in the standard method mentioned above. The business will pay VAT at 16.67% of the margin. Businesses selling second-hand goods, works of art, antiques and collectors’ items can all join the scheme. If the business was charged VAT when purchasing the item they cannot apply this scheme.

Source: How VAT works: VAT schemes – GOV.UK

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