VAT Schemes in the UK: A Guide for Businesses

VAT Schemes in the UK: A Guide for Businesses

For businesses operating in the UK, understanding Value Added Tax (VAT) schemes is crucial. Not only does VAT impact your cash flow, but navigating the different options can feel overwhelming. This blog post simplifies VAT schemes in the UK, helping you choose the most suitable one for your business.

VAT is a consumption tax levied on the supply of goods and services. In the UK, the standard VAT rate is 20%. Businesses registered for VAT must charge VAT on their sales and account for the VAT they pay on their purchases. The difference is then remitted to HMRC (His Majesty’s Revenue and Customs).

Before we delve into the schemes available, note that the new threshold for registration of VAT is now a turnover (not profit) of £90,000.00 within any given 12-month period.

Simplifying VAT Calculations through VAT Schemes

The good news is that you don’t always have to calculate VAT on every transaction. HMRC offers various VAT schemes designed to simplify the process for different business types and sizes. Here’s a breakdown of the most common ones.

VAT Flat Rate Scheme

Ideal for small businesses with a turnover below £150,000 where you pay a fixed percentage of your total turnover to HMRC as VAT.  This simplifies record-keeping, but you cannot reclaim VAT on most purchases so it is ideal for businesses with little expenditure.  There are nuances within this scheme but it serves various professional types well.

VAT Annual Accounting Scheme

Open to businesses with a turnover under £1.35 million. This scheme allows you to submit just one VAT return per year instead of the usual four. It involves estimated advance payments based on previous VAT returns.

VAT Cash Accounting Scheme

This scheme suits businesses that trade on credit terms. You pay VAT to HMRC when you receive payment from customers, rather than when you invoice them.

VAT Retail Schemes

These schemes simplify VAT calculations for businesses that primarily sell goods. There are three options: Point of Sale, Apportionment, and Direct Calculation. Each scheme streamlines VAT record-keeping for specific retail situations.

VAT Margin Scheme

For businesses dealing with second-hand goods, it is a simplified way to calculate VAT for specific goods, rather than the standard method.  You pay VAT on the difference between the buying and selling price (margin/profit).

Choosing the Right VAT Scheme

The best VAT scheme for your business depends on several factors, including your annual turnover, industry, trading patterns, and level of record keeping.

For detailed information on each scheme, eligibility criteria, and application processes, please refer to the official HMRC website.