What are the VAT accounting schemes?

There are various VAT accounting schemes available to help you calculate VAT quickly and without hassle.  The following schemes are the most commonly used and recommended.

Standard:  the default scheme all businesses are set up on when registered for VAT.  VAT is charged to the customer at the appropriate rate (normally 20%) and you pay VAT charged to you from suppliers at the appropriate rate.

Once the VAT period is due you deduct the VAT from the invoices that you have been charged by suppliers from the VAT on the invoices you have charged to your customers.  This resulting difference is paid to HMRC.

The VAT is calculated on invoices received and sent and does not make allowances for payments not sent and not received.

Cash accounting:  similar to the above scheme but instead of calculating VAT on invoices, VAT is calculated on payments made and received.  This ensures you only pay VAT on those invoices that you have collected the money against.  However, it also means you can only claim VAT on supplier invoices you have paid.

This method can help cash flow but you can only use this scheme if turnover is not more than £1.35 million in the next year.

The cash accounting scheme is ideal for businesses that are not paid instantly or have problems getting money in.

Flat rate scheme:  using this scheme you do not have to calculate the VAT on each and every transaction.  Instead, you pay a percentage of your gross turnover (inclusive of VAT).  The percentage is based upon the trade sector you operate within and is a lower amount as it takes into account the fact that you are not reclaiming VAT on your purchases.  The percentage is calculated based upon industry-standard average and expected activity. 

Although this scheme is much simpler to operate, one downside is that you cannot claim VAT on purchases.  If you buy lots of goods and services from VAT registered businesses you could end up paying more VAT.

The flat rate scheme is ideal for those businesses that offer services such as consultancy, though, from the 1st April 2017, businesses classed as 'limited cost', such as those that provide a service, where required to operate at 16.5%. On this basis, the flat rate scheme is generally only beneficial in the first year of registration, when you receive a 1% discount to 15.5%.