VAT schemes explained

When it comes to managing finances, VAT is a key consideration for many business owners. To simplify this process, HMRC provides a variety of VAT schemes designed to suit the needs of different businesses. 

In this blog post, we’ll outline the available VAT schemes in the UK and highlight which types of businesses they are best suited for. 

What is a VAT scheme?

A VAT (Value Added Tax) scheme is a method used by companies that have registered for VAT to account for and pay the tax to HMRC.  

There are several schemes designed to simplify VAT reporting, improve cash flow, and provide flexibility in how VAT is calculated and paid. 

Here is a breakdown of the main VAT schemes in the UK: 

Standard VAT Accounting Scheme

The Standard VAT Accounting Scheme is the most commonly used method for VAT-registered businesses in the UK.  

This scheme requires businesses to charge VAT on their sales (output tax) and reclaim VAT on their purchases (input tax), while also submitting regular VAT returns to HMRC, usually quarterly or annually. 

Companies must pay the VAT owed to HMRC based on the difference between the VAT charged on their sales and paid on purchases.  

This method is suitable for most businesses, particularly those that are not eligible for any of the special VAT schemes. 

VAT Flat Rate Scheme 

The Flat Rate VAT Scheme is designed to reduce the administrative burden on small businesses in the UK. 

Under this scheme, companies pay HMRC a fixed percentage of their gross turnover based on their industry type, rather than calculating VAT on each sale and purchase. While businesses continue to charge the standard VAT rate (usually 20%) to their customers, they retain the difference between what they charge and the flat rate they pay. 

However, they are unable to reclaim VAT on most purchases, with the exception of certain capital assets worth more than £2,000.  

This scheme is available to businesses with an annual VAT-inclusive turnover of £150,000 or less. 

VAT Annual Accounting Scheme

The VAT Annual Accounting Scheme helps to reduce the frequency of returns for small businesses.  

Instead of filing quarterly VAT returns, businesses make advance payments throughout the year based on their estimated annual VAT liability. At the end of the year, they submit a single VAT return and either pay a final balancing payment or receive a refund if they overpaid. 

This scheme can help improve cash flow management and reduce administrative workload because businesses only need to submit one return per year.  

It is available to VAT-registered businesses with an expected taxable turnover of £1.35 million or less, and it can be especially useful for those looking for more consistent VAT payment schedules. 

VAT Cash Accounting Scheme

The VAT Cash Accounting Scheme is a flexible option that allows businesses to account for VAT using actual payments rather than invoices. 

This means that VAT on sales is only paid to HMRC when customers pay their invoices, and VAT on purchases can only be reclaimed after the business pays its suppliers. 

The scheme is especially beneficial for improving cash flow because companies are not required to pay VAT on unpaid invoices. 

It is available to businesses with an annual taxable turnover of £1.35 million or less, making it an appealing option for small and medium-sized businesses seeking to align their VAT obligations with their cash flow.

VAT Margin Scheme

The VAT Margin Scheme is a specialised VAT accounting method for businesses that sell second-hand goods, antiques, works of art, or collectors’ items. 

This scheme calculates VAT only on the difference (or margin) between the purchase price and the selling price of an item, rather than the entire selling price. This allows companies to avoid charging VAT on a portion of the selling price that was already taxed when the item was first purchased. 

The scheme is beneficial for sellers as it reduces their overall VAT liability. However, it has specific rules, such as requiring detailed records of purchases and sales, and excluding items purchased from VAT-registered suppliers who charged VAT on their sale. 

If you run a retail business, there are specific schemes that can make calculating your VAT easier. 

There are three standard VAT retail schemes. 

Point of Sale Scheme

The Point of Sale Scheme was developed for retailers who sell a large volume of low-value goods at different VAT rates, such as standard, reduced, or zero-rated items.  

This scheme enables retailers to calculate the VAT due at the point of sale using the actual VAT rate of each item sold. It simplifies VAT reporting by eliminating the need to keep detailed records of individual sales for VAT purposes, as the VAT liability is calculated automatically using the retailer’s till or sales system. 

The scheme is particularly useful for businesses that sell a wide variety of products, such as supermarkets or gift shops. 

Apportionment Scheme

The Apportionment Scheme is designed for retailers who sell goods at different VAT rates but find it impractical to track the VAT rate for each sale. 

This scheme calculates the VAT owed by businesses based on the proportion of total sales value attributed to standard-rated goods. This is done by categorising their purchases by VAT rate and using a formula to calculate the appropriate VAT liability. 

This scheme is best suited to those unable to separate their sales by VAT rate at the point of sale, such as those who operate in mixed retail environments. 

Direct Calculation Scheme

The Direct Calculation Scheme is for retailers who sell a variety of goods at different VAT rates but prefer to calculate their VAT liability directly from their purchase records. 

Under this scheme, businesses calculate the VAT due by identifying the VAT already included in the selling price of their goods, based on the VAT paid when purchasing stock.  

This method is best suited for companies that keep detailed records of purchases and can directly link them to sales. 

Here are some things to keep in mind if you’re considering using a retail scheme: 

• If your turnover excluding VAT exceeds £130 million, you must agree on a bespoke retail scheme with HM Revenue and Customs (HMRC).  

• You can use a retail scheme in conjunction with the Cash Accounting Scheme and the Annual Accounting Scheme.  

• Retail schemes cannot be used in conjunction with the Flat Rate Scheme. 

How One Two One Accounts can help 

Understanding VAT schemes and choosing the right one for your business can be a challenge, but you don’t have to navigate it alone.  

At One Two One Accounts, we can provide expert advice tailored to the specific needs of your business, ensuring you get the most out of the available schemes. 

If you’re unsure which scheme suits your business, need help with VAT registration, or require ongoing support with compliance and reporting, our team is here to guide you every step of the way.  

We are also experienced in navigating the successful completion of VAT returns, ensuring you don’t pay any more tax than you need, whilst staying within government guidelines. 

For personalised advice on the best VAT scheme for your business, or support with VAT returns, get in touch with a member of our team today.