VAT

8. VAT Accounting Schemes

8.1 Apart from retailers, almost all small businesses use the cash accounting system. This means that the tax point is the date cash is received (from sales) or paid.

• You can choose cash accounting as long as your annual sales are below £1.35 million.
• If you have to leave the scheme, in most cases you will be able to account for VAT on sales and purchases made while you were in the scheme on a cash basis.
• One pitfall of cash accounting specifically affects start-up businesses. You may not be able to claim back VAT on purchases made in your setting-up period.

8.2 With the annual accounting scheme you only need to file one VAT return each year. You make nine monthly interim VAT payments based on an estimate of your total annual VAT bill with the balancing payment due when you submit your return.

• Businesses with a turnover of up to £1.35 million may apply to use this system.
• Any business under the threshold can use the scheme from the date of VAT registration.
• The leaving threshold is £1.6 million.

8.3 A flat-rate scheme is also available as an alternative to the normal transaction-based method of VAT accounting.

• VAT is charged as a fixed percentage of your VAT-inclusive turnover according to your type of business, ranging from five to 14.5 per cent. Individual transactions are ignored and broadly you are not allowed to recover VAT incurred on your purchases.
• You can use the scheme if your taxable turnover is up to £150,000 and your total taxable turnover (including exempt and zero-rated supplies) is up to £187,500. The amount of VAT collected will be about the same, but there is much less work.