Standard Scheme
This is the default scheme you will be assigned to unless you state otherwise, it is known as the Standard VAT scheme. On this scheme you are able to reclaim VAT at the point an invoice is received from your supplier, for example, before you’ve actually paid the money. You’ll also be liable for the VAT on sales at the point you send an invoice to your customer, (even before you’ve received the money from them). This means if a customer doesn’t pay the money, you’ll need to account for the ‘bad debt’, once the invoice has been outstanding for six months.
Cash Accounting
As a twist to the Standard Scheme you can elect to use the Cash Accounting Scheme for VAT. Under this scheme you account for the VAT in the quarter your customer pays you and for costs when they are paid. This is often beneficial for small businesses, particularly if your customers take longer to pay you than you take to pay costs. But, you will also need to consider that you can’t reclaim VAT on your purchases until you have paid for them.
Who is eligible? You can use this scheme if your estimated VAT taxable turnover is not more than £1.35m.
Flat Rate Scheme
The Flat Rate Scheme is designed to help small businesses reduce the amount of time they spend accounting for VAT. Using this scheme you don’t have to calculate the VAT on each and every transaction. Instead, you simply pay a flat rate percentage of your turnover as VAT.
You can apply to HMRC to use this scheme if your VAT taxable turnover (excluding VAT) is less than £150K.
What are the advantages of this scheme?
- Record keeping is easier with fewer rules to follow
- You can be confident of how much you will need to pay
- The percentage is less than the standard VAT rate because it takes into account the fact that you’re not reclaiming VAT on your purchases.
- There’s a range of flat rate percentages; the one you use depends on your trade sector.
See below guide from HMRC which also includes the relevant percentages:
http://www.hmrc.gov.uk/vat/start/schemes/flat-rate.htm
Please note that you must leave the scheme if:
- at any anniversary of your joining the scheme your previous year's VAT-inclusive turnover was more than £230,000; or
- you think your turnover in the next 30 days alone will be more than £230,00
If you are a small service based business with minimal costs, such as if you are an IT Contractor, the Flat Rate Scheme can be very beneficial and generate more profit for your business than if you were on the Standard Scheme
The Cash Accounting Scheme can also be used in combination with the Flat Rate Scheme and this is often our default recommendation
0 Comments