VAT can be complex and time consuming, so for many SMEs it can become a burden, due to lack of resources or expertise. Not being fully aware or understanding the various types of VAT and how best to administer it, will cause mistakes to be made and unnecessary time and resources being wasted.
Each type of scheme has criteria you must fulfil and some may be more beneficial than others, possibly saving valuable resources.
Eligibility for VAT schemes
Once you have a turnover above £82,000, you must register for VAT. The turnover limit for joining the Annual Accounting Scheme and the Cash Accounting Scheme is £1.35 million or below. For the Flat Rate Scheme, the turnover limit is £150,000 or lower.
What is the Flat Rate Scheme?
The Flat Rate Scheme is relatively simple to operate, although there are some aspects to be wary of. This scheme works by adding up your invoices and adding VAT at the standard rate of 20 per cent.
The flat rate for your trade, which can be found on the HMRC website, is applied to this total, leaving your business income.
For example: invoices totalling £2,000 plus 20 per cent VAT is £2,400. If the flat rate for your trade is 10 per cent, you can subtract £240 from the £2,400, leaving business income of £2,160. Although this amount seems greater than the invoice amount, you won’t be reclaiming VAT.
What is a Cash Accounting Scheme?
The amount in payments received and made by a business forms the basis of the Cash Accounting Scheme. Usually, liability is calculated using the invoice amount. As many businesses receive payment for goods and services in arrears, this is beneficial for the company cash flow. You only pay VAT on the amounts that are paid, so you don’t lose out with bad debts. You don’t have to notify HMRC if you decide to use this accounting scheme.
What is the Annual Accounting Scheme?
An amount of VAT is paid monthly or quarterly based on your estimated VAT liability for the previous year. If you have a new business, you will estimate future turnover. The estimated amount is divided equally between four or 12 payments through the year. This method will be beneficial to your cash flow and budgeting. However, you have to be careful not to under estimate your VAT liability, as this can result in a shortfall at the year end, which will need to be rectified.
How will you manage your VAT?
To ensure you are doing what is best for your business, whilst adhering to the legislation of the various VAT schemes you need to make sure your business is managing this accordingly. Not doing so will lead to HMRC challenging and at worst investigating your business finances.
Ensuring you have the correct VAT scheme for your business and the expertise to manage it will save your business time, money and resource.
If you would like to understand more about these schemes or discuss the various options and discover which would be most suitable for your company, give us a call now.