VAT

8. VAT Accounting Schemes

8.1 Apart from retailers, most small businesses use the cash accounting system, where you account for VAT on the basis of the date cash is received (from sales) or paid out (on purchases) rather than the tax point.

• A business can use cash accounting if estimated VATable turnover for the next tax year is no more than £1.35 million.
• Once using cash accounting a business can remain in the scheme until VATable turnover reaches £1.6 million.
• Businesses using the scheme from the outset should reclaim VAT on pre-registration purchases on the first VAT return otherwise claims may be blocked.

8.2 With the annual accounting scheme, only one VAT return is filed each year. Nine monthly or three quarterly interim VAT payments are made based on an estimate of the total annual VAT bill. A balancing payment is due when the annual return is submitted.

• Businesses with an estimated VATable turnover of up to £1.35 million may apply to use this system and can remain in the scheme until turnover reaches £1.6 million.
• Businesses under the threshold can use the scheme from the date of registration.

8.3 A flat rate scheme is also available as an alternative to the normal transaction-based method of VAT accounting. Individual transactions are ignored and input VAT cannot normally be reclaimed.

• Instead, VAT is paid to HMRC as a fixed percentage of your VAT-inclusive turnover according to the category of business, ranging from 4 to 14.5 per cent (invoices issued still show the normal VAT rates). There is a one per cent reduction for businesses in their first year of VAT registration.
• The scheme can be used if estimated VATable turnover is up to £150,000. Once in the scheme, you can stay until total business income exceeds £230,000.