The quarterly process of completing VAT returns can be time consuming. However, there are alternative VAT accounting schemes out there, designed to lessen the administrative burden, reduce the scope for error and free up your time to concentrate on running your business.
Flat Rate Scheme
The Flat Rate Scheme for VAT is designed to simplify VAT accounting by calculating your VAT liability as a fixed percentage of your total VAT inclusive turnover.
Businesses with an annual turnover of £150,000 or less are eligible to join the scheme and once you join you can stay in the scheme until your total annual business income exceeds £230,000.
The flat rate percentages vary between 5.5% and 14.5% depending on your particular business sector. If you are newly VAT registered, there is also a one per cent reduction in the flat rate percentage for the first year of registration.
Under the scheme, you charge the full VAT at 20% to your customers, but only pay over the flat rate percentage to HMRC. You keep the difference. However, you cannot offset the VAT you pay on purchases, except in the case of certain capital assets costing more than £2,000, including VAT.
The Flat Rate Scheme won’t be right for all businesses and this will largely depend on your mix of sales and the level of VAT currently suffered on your purchases, but for eligible small businesses this is a genuine opportunity to simplify your VAT returns and, reduce the scope for mistakes. It may even save you money!
Annual Accounting Scheme
The Annual Accounting Scheme for VAT is exactly that, an annual process. Unlike standard VAT accounting, where VAT returns are required to be submitted on a quarterly basis, the Annual Accounting Scheme allows you to submit one VAT return covering the previous twelve months trading.
You can use the scheme if your annual VAT turnover is £1.35 million or less and once you join you can stay in the scheme until your annual VAT turnover exceeds £1.6 million.
Under the Annual Accounting Scheme, you make either nine monthly, or three quarterly interim payments towards your VAT liability, with a balancing payment or refund falling due two months after your year end.
As well as saving time, the Annual Accounting Scheme can help businesses better manage their cashflow by offering flexible monthly or quarterly installments.
In addition, the scheme gives you an extra month to file your VAT return and pay the balance of your VAT liability, when compared with standard VAT accounting.
Cash Accounting Scheme
Under standard VAT accounting, VAT is generally payable on invoices issued in the VAT quarter, irrespective of whether your customer has actually paid you. Using the Cash Accounting Scheme, VAT only becomes payable to HMRC once your invoice has been paid.
The annual VAT turnover thresholds for the Cash Accounting Scheme are identical to the Annual Accounting Scheme.
This scheme offers automatic bad debt relief and improved cash flow, but on the flip-side you cannot recover the VAT suffered on your purchases until you have paid your supplier.
And finally, don’t forget that from 1 April 2012, all businesses, irrespective of size, are required to file their VAT returns online and pay any VAT due electronically!