Vat Flat Rate Scheme

The VAT flat rate scheme was introduced on 24th April 2002 and was designed to assist small businesses through calculating VAT payments as a percentage of their turnover.
This scheme was developed to reduce the cost of complying with VAT obligations and the time spent by removing the need to calculate and record output and input tax in calculating the net VAT.
The scheme is optional and available to businesses with a VAT exclusive annual taxable turnover of up to £150,000(£225,000 after 1 April 2009) and total turnover including the value of exempt supply and other non- taxable income does not exceed £187,500(not required after 1 April 2009).
The flat rate percentage depends on the trade sector of the business you are running and it can range from 2% to 13.5%.
To see the category of the business you are falling into and what percentage you need to use follow this link from hmrc. As you could probably notice, the flat rate percentages have been changed since the decrease of normal VAT rate from 17.5% to 15%.
Under this scheme, businesses charge their customers the normal rate for the supply of goods and services.
Although businesses do not need to calculate the VAT on each and every transaction they make, they still need to keep a record of their flat rate calculation showing their turnover, the percentage used and the tax calculation.
As far as capital assets are concerned,for those costing more than £2000 (including VAT), the VAT can be recovered in the normal way as long as they meet certain conditions.
There are a few special categories of businesses like farmers, barristers and florists where special VAT flat rate rules apply. About all this we can explain more in due course.
Taxfile's tax accountants in South London and Exeter will first assess your eligibility for the flat rate scheme then will weight up pros and cons and see how beneficial it is for you.
Then finally they will register you within the scheme and offer ongoing support.

VAT Accounting Schemes

Using Standard VAT Accounting, we must complete four VAT returns each year. Any VAT due is payable quarterly, and any VAT refunds due are also repayable quarterly.
In contrast to standard VAT accounting, there are several alternative ways we can account for VAT that could save us time and money. Each of the schemes has advantages and disadvantages.

Among these schemes we can mention the following:

Annual accounting for VAT

Using this method, VAT is paid on account throughout the year in nine monthly or three quarterly instalments. These instalments are based on the VAT paid in the previous year. If the business has been trading for less than a year, the instalments are based on an estimate of the VAT liability.

Advantages:

•we only have to send a VAT return once a year

•reduces the amount of time spent in sorting out paperwork

• improves the cash flow of the business

Disadvantages:

•this method is not suitable for businesses that regularly reclaim VAT as they would only get one repayment at the end of the year.

• if the turnover of the business decreases, the payments may be higher than under the standard VAT accounting.

Cash accounting for VAT

When using the standard VAT accounting, the VAT is payable when an invoice is issued.
Advantage:
•If we use the cash accounting scheme, we do not need to pay VAT until the customer has paid us.

• it is a beneficial method because it improves the cash flow

• we do not need to pay the VAT if the client never pays us.

Disadvantage:

•we cannot reclaim VAT on purchases until we have paid for them.

The flat rate VAT scheme

The flat rate VAT scheme is designed to help small businesses reduce the amount of time they spend accounting for VAT.

Advantage:

• we do not have to calculate the VAT on each and every transaction but just pay a flat rate percentage of the turnover as VAT

Disadvantage:

• one minus using this scheme is that we cannot reclaim VAT on our purchases, especially if we buy a lot of goods and services.

VAT schemes for retailers

Retailers, especially those who sell a high volume of low value goods to the general public, can find it very time consuming and costly to issue VAT invoices for every sale. The VAT retail schemes enable retailers to aggregate their sales and account for VAT on the total.

The main retail schemes are: apportionment schemes, direct calculation schemes and the point of sale scheme.

Margin schemes for second-hand goods, art, antiques, collectibles

The VAT we can recover when buying and selling second-hand goods is quite limited.

Advantage:

•This scheme comes in handy because it calculates the VAT on the difference between the purchase price and the sale price , that is the margin.

•Disadvantage:

•we need to keep very detailed records, otherwise we will be liable for VAT on the full selling price.

Tour operators' margin scheme

Tour operators often buy goods and services from businesses in foreign countries, and cannot often reclaim their input tax. The Tour Operators' Margin Scheme solves this problem by allowing tour operators to calculate the VAT on just the value that they add.

As every method comes with pros and cons, it is better to seek guidance from tax accountants like Taxfile in South London and Exeter to analyse your circumstances and tell you which scheme suits you best.