Posts Tagged ‘vat’

VAT accounting schemes

Monday, August 11th, 2014

This guide looks at how the 3 main accounting schemes work and how they can help businesses.


Special VAT accounting schemes for small businesses have been available for a number of years, but they are still underused. The 3 main schemes are: cash accounting, annual accounting and the flat rate scheme.


The cash accounting scheme (CA)

Cashflow can often be a headache for businesses. Were it not for this scheme, VAT would be due based on invoice dates, which means paying HMRC on unpaid invoices at the end of each period. CA enables businesses to account for VAT on the basis of payments received and made instead.


Input tax not being deductible until purchase invoices are paid is a disadvantage, but as the norm is making a profit, the scheme is usually beneficial.


CA can be used by businesses with an expected taxable turnover not exceeding £1,350,000 in the next 12 months. The business must also be up to date with its VAT payments or have agreed a plan with HMRC for clearing any outstanding debts.


The key factor in deciding whether or not to use CA is the period of time between issuing sales invoices and receiving payment – the longer the gap, the stronger the case for CA. Clearly, it would also not be advantageous for repayment traders to use it where input tax regularly exceeds output tax.


Other advantages are:


  • simplified accounting, in that well-analysed cash and bank records are usually enough
  • no need for VAT relief on bad debts because it is not paid to HMRC up front.

There are other conditions for using the scheme, such as having to use it for the whole of a business and normally staying in it for at least 2 years, but these are not usually a burden.


Businesses can leave the scheme at any time if they are not benefiting from it or struggling with the accounting requirements. Records must be kept in such a way that invoices issued and received can be easily cross-referred to payment dates but that is usually straightforward.


It is not compulsory to leave the scheme and revert to accruals-based accounting until annual taxable turnover reaches £1,600,000. This built in 25% tolerance gives flexibility for growing businesses. On leaving the scheme, all outstanding tax must be paid within 6 months of the leaving date.

The annual accounting scheme (AA)

AA was introduced at the same time as CA and has the same turnover thresholds for joining and leaving it. It involves making pre-agreed payments on account and completing only 1 VAT return per year. So its purpose is to aid cashflow and budgeting.


For those wishing to join the scheme who have been VAT registered for less than a year, the taxable turnover for the purpose of the scheme is usually the amount shown on the application to register. In any case, the value of capital asset sales or anticipated sales is ignored.


An application form must be completed in order to join the scheme. Businesses that apply to register for VAT online can apply online to use AA if the application is submitted at the same time.


Withdrawal from the scheme is possible at any time by application in writing to the business’s local VAT office.


Benefits of AA:

  • only 1 VAT return is required each year, with an extra month for submission
  • the return can be prepared at the same time as the annual accounts
  • cashflow is known in advance
  • monthly payments spread the load
  • it simplifies the operation of retail or partial exemption schemes.
Sometimes the regular payments set for a subsequent year can be unreasonably high but, if the difference is significant, a reduction can be negotiated. Seasonal variations can also have an impact either way.


The regular budget payments are usually:

  • 9 monthly interim payments of 10% of the previous year’s VAT payments (or 10% of their estimated payments if registered for less than a year), commencing on the last day of the fourth month of the VAT year, or
  • 3 quarterly interim payments of 25% of the previous year’s VAT payments (or 25% of their estimated payments if registered for less than a year).


The monthly method is the default unless the business specifically requests quarterly payments.


Payments can be adjusted to allow for any expected changes in turnover and trading. The annual return then shows actual VAT due for the year then ending and the balance, if any, of that amount, less the budget payments already made, is due no later than 2 months after the return date. Payments must be made by direct debit, or by a choice of electronic payment methods.


Failure to comply with the scheme rules, or general non-compliance with other VAT rules can result in expulsion from the scheme.

The flat rate scheme (FRS)

FRS was introduced more recently than the other 2 schemes and has a much lower turnover threshold for eligibility, meaning fewer businesses can use it.


Its objective is to reduce the cost of VAT compliance. It does this by applying a fixed percentage to gross income, which builds in an allowance for deemed input tax, thus avoiding the need for detailed records of purchases and expenses. Invoices are still issued and received as normal. It is just the VAT accounting which is simplified.


FRS is available to businesses that expect their VAT exclusive taxable turnover (excluding expected sales of capital assets) in the next 12 months to be no more than £150,000. As with the other schemes, there is a tolerance threshold meaning businesses using the scheme can continue to do so until their taxable turnover increases to £230,000.


As the fixed percentage applies to all income, the largest advantage is to eligible businesses making only standard rated supplies. Although the fixed rate is designed to allow for typical zero-rated and exempt supplies by the type of business (as well as to give a set credit for input tax), users may be disadvantaged if they make a lot of that type of supply. It is always worth comparing the scheme against normal VAT accounting first, to ensure there is a benefit.


A table of FRS rates is available from HMRC, which is usually only changed if there is a VAT rate change. It is important for the user to ensure their business has the correct classification. If their activity includes supplies in 2 or more sectors, the percentage to be used is that appropriate to the main activity as measured by expected turnover in the year ahead.


Joining the scheme is by completing an application on form online (if the business used HMRC’s online services to register for VAT) or by downloading the form and posting it to HMRC.


Contact us if you are considering registering for one of these schemes.

VAT online filing relaxed

Monday, June 2nd, 2014

HMRC has proposed to relax the current online filing of VAT returns. They are going to improve the telephone filing service by making it possible for taxpayers to ring HMRC rather than making an appointment for HMRC to ring them. They are also providing: a dedicated line, and providing a service outside normal working hours. The service will be more widely publicised and guidance provided.

The change of approach has been largely due to recent tax cases that have challenged the mandatory online filing process for most taxpayers. In one case the judge found that requirement breached the human rights of those who were unable to file online because they were computer illiterate due to age, or had a disability that made using a computer accurately very difficult or painful, or they lived too remotely for a reliable internet connection.

VAT registered traders should be able to take advantage of non-online filing if they are:

  • elderly,
  • disabled,
  • in a remote location where internet access is not available,
  • unable to file online for any other reason

The changes should provide those groups with telephone filing, or paper filing alternatives.

Tax Diary June/July 2014

Monday, June 2nd, 2014

1 June 2014 – Due date for Corporation Tax due for the year ended 31 August 2013.

19 June 2014 – PAYE and NIC deductions due for month ended 5 June 2014. (If you pay your tax electronically the due date is 22 June 2014.)

19 June 2014 – Filing deadline for the CIS300 monthly return for the month ended 5 June 2014.

19 June 2014 – CIS tax deducted for the month ended 5 June 2014 is payable by today.

1 July 2014 – Due date for Corporation Tax due for the year ended 30 September 2013.

6 July 2014 – Complete and submit forms P11D return of benefits and expenses and P11D(b) return of Class 1A NICs.

19 July 2014 – Pay Class 1A NICs (by the 22 July 2014 if paid electronically).

19 July 2014 – PAYE and NIC deductions due for month ended 5 July 2014. (If you pay your tax electronically the due date is 22 July 2014.)

19 July 2014 – Filing deadline for the CIS300 monthly return for the month ended 5 July 2014.

19 July 2014 – CIS tax deducted for the month ended 5 July 2014 is payable by today.

Small business VAT scheme

Tuesday, May 13th, 2014

If you are a registered VAT trader and your present turnover is below £150,000 you may be advised to take a look at the VAT Flat Rate Scheme (FRS).

FRS users pay VAT as a fixed percentage of their total sales including VAT. You still add 20% VAT to your invoices but you cannot reclaim VAT on purchases or expenses paid.

The flat rate that you apply depends on the business sector in which you trade. Rates vary from 5% to 14.5%.

Benefits of using the Flat Rate Scheme

Using the Flat Rate Scheme can save you time and smooth your cash flow. It offers these benefits:

  • You don't have to record the VAT that you charge on every sale and purchase, as you do with standard VAT accounting. This can mean you spending less time on the books, and more time on your business. You do need to show VAT separately on your invoices, just as you do for normal VAT accounting
  • If you are in your first year of VAT registration you get a one per cent reduction in your flat rate percentage until the day before the first anniversary you became VAT registered
  • You no longer have to work out what VAT on purchases you can and can't reclaim
  • With less chance of mistakes, you have fewer worries about getting your VAT right
  • You always know what percentage of your takings you will have to pay to HMRC

Potential disadvantages of using the Flat Rate Scheme

The flat rate percentages are calculated in a way that takes into account zero-rated and exempt sales. They also contain an allowance for the VAT you spend on your purchases. So the VAT Flat Rate Scheme might not be right for your business if:

  • You buy mostly standard-rated items, as you cannot generally reclaim any VAT on your purchases
  • You regularly receive a VAT repayment under standard VAT accounting
  • You make a lot of zero-rated or exempt sales

It is well worth crunching the numbers to see if a switch to FRS would be advantageous. It is possible that using the FRS would save you money as well as time.

VAT Mini One Stop Shop (MOSS)

Tuesday, April 29th, 2014

Currently, the place of taxation for broadcasting, telecommunications and e-services (BTE) supplies is determined by the location of the supplier of the services. However, from 1 January 2015, the place of taxation for private consumers will be determined by the location of the consumer.

Business to business supplies are unaffected; this change will only concern suppliers of BTE services to private consumers.

To save you having to register for VAT in every EU Member State where you supply BTE services, you may opt to use the VAT Mini One Stop Shop online service (VAT MOSS). This will be available on 1 January 2015, but you will be able to register to use it from October 2014.

For example, if you register for the VAT MOSS online service in the UK, you will be able to account for the VAT due on your business to private consumer sales in any other Member States by submitting a single VAT MOSS return. This will include any related payment to HMRC. HMRC will send an electronic copy of the appropriate part of your VAT MOSS return, and the related VAT payment, to each relevant Member State's tax authority on your behalf. The VAT rate used will be that of each Member State of Consumption at the time the service was supplied.

The changes in the underlying VAT place of supply rules are complex. If you feel you may be affected please contact us at an early date so we can advise you on any alterations, if any, you will need to make to your record keeping systems.

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