22nd July 2022
Becoming VAT registered is compulsory when your company’s taxable turnover goes over the threshold of £85,000 or if you expect the turnover to go over £85,000 in the next 30 days.
You can also choose to become VAT registered voluntarily but you should look at the pros and cons for your business first.
For example, this can be beneficial for businesses with large vatable expenditure, enabling the company to reclaim VAT. However, it is worth considering that this will increase your admin workload as well as having to account for VAT on the company’s sales once the company becomes VAT registered.
There are also various schemes businesses can sign up for, depending on what suits your business needs.
Here are some of the accounting schemes that are available:
- Standard Scheme
- Cash Accounting Scheme
- Annual Accounting Scheme
- Flat Rate Scheme
Standard Scheme
With the standard scheme you pay VAT on invoices issued and reclaim VAT on invoices received. The NET amount to pay is the difference between the invoices issued and received, also known as box 5 figure. With this scheme you will be submitting the VAT returns quarterly along with quarterly payments or monthly VAT returns along with monthly payments. The due date to submit and pay VAT returns in the UK is 1 month and 7 days following the reporting period. For example, if the VAT return is for the period 1 April – 30 June, the VAT return would need to be submitted and paid by the 7August.
Cash Accounting Scheme
The cash accounting scheme differs from the standard scheme. Instead of using invoices as the basis for paying VAT to HMRC, VAT on sales is not accounted for until the payment is received. The same goes for expenditure where the business does not reclaim VAT until payment has been made. This is useful to businesses as this helps to aid cash flow.
If you regularly purchase goods on credit this scheme will not benefit your business as you will not be able to claim VAT until purchases have been paid. The returns are still submitted every quarter. Your taxable turnover to join this scheme must be under £1.35 million and VAT returns, and payments must be up to date.
Annual Accounting Scheme
Under the Annual Accounting scheme, businesses submit one yearly return and make 9 monthly payments (based on previous year) spreading the cost across the year. If you have been registered for less than 12 months your payments will be based on an estimate of what you’ll be due to pay for the coming year. This scheme gives you two months to complete the VAT return and make any balancing payments outstanding. Your estimated taxable turnover to join the annual scheme must also be £1.35 million or less.
Flat Rate Scheme
The flat rate scheme works a little differently, you pay VAT to HMRC at a fixed percentage of your sales and charge the usual rates to your customers (e.g. 20% or zero rated). You keep the difference between what you charge your customers and pay to HMRC. Your VAT taxable turnover must be less than £150,000 to join.
You will also receive a 1% discount on your flat rate percentage if you are in your first year of VAT registration. This means you can take 1% off your flat rate up until the day before your first anniversary of becoming VAT registered. You don’t need to work out what you can and can’t claim and you always pay the same percentage. You cannot reclaim VAT on your purchases, so for a business that has a large amount of standard rated purchases they will not benefit from this scheme, nor will you if you sell mainly zero rated and exempt supplies.
The VAT flat rate for companies to use depends on the business activity. Please see the link below for details on which flat rate your business would use:
https://www.gov.uk/vat-flat-rate-scheme/how-much-you-pay
In some cases, you may be classed as a limited cost trader. In this case, businesses will use 16.5% as their VAT flat rate. You are classed as a ‘limited cost trader’ if your spend on goods for the period is less than either:
- 2% of your turnover
- £1,000 a year (if costs are more than 2%)
If you would like more information on these VAT Schemes, or you are unsure which would be best for you please feel free to contact us on 01903 300230, or email info@thlaccountancy.co.uk