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Value Added Tax in simplified terms (Part 2)
First of all I hope that the first part of the article has been useful and was easy to understand. As I mentioned previously, I will briefly explain the different VAT accounting schemes that are available to certain businesses.
Beside the standard VAT accounting where VAT is accounted for when invoices are raised and received. There are other schemes available which could save businesses time and money.
Cash Accounting scheme
Under this scheme VAT is accounted for based on the amount received and paid. This can be good for cashflow especially for businesses that are slow in recovering money from customers and have short credit days.
For a business to be eligible for the cash accounting scheme, they must meet the following conditions:
- The business must be up to date with all VAT returns and respective payment made. Also the business must not have any previous convictions or penalties for VAT offences.*
- The estimated turnover for taxable supplies during the next tax year must be below £1.35m.*
- The business has to stop using the cash accounting scheme once the total turnover (taxable supplies) has reached £1.6m.*
However, if you use the cash accounting scheme, standard VAT accounting should be used if a business:
- Raises a VAT invoice for which payment is not due within 6 month
- Raise a VAT invoice in advance of providing goods or services
- Is involved in acquisition of goods from other EU states
- Buys or sells goods using lease purchase, hire purchase, conditional sale or credit sale
- Removes goods from a Customs warehouse or free zone
No notification is required to the HMRC to start using the cash accounting scheme. It can be used at the beginning of a VAT quarter or at the registration date.
Annual Accounting VAT scheme
This scheme relieves businesses of the burden of having to make VAT returns quarterly as only one VAT return is made for the year.
Payment under this scheme can be made either by:
- 9 instalments of 1/10th of the estimated amount due and the final payment equal to the balance at the year end.
- 3 instalments of 25% of the estimated amount due and a final payment at the year end
The first payment is due at the end of month 4 and the VAT return is due 2 months after the year end together with the final payment.
The Annual accounting scheme can also be accounted on a cash basis (cash accounting scheme)
The condition for using the Annual Accounting Scheme is the same as the cash accounting scheme.*
Unlike the cash accounting scheme, to use the annual accounting scheme businesses have to make an application with the HMRC but can leave the scheme voluntarily.
Flat Rate Scheme
The Flat rate scheme is for businesses with a taxable turnover (excluding VAT) of less than £150 000 and a total estimated turnover of the following year not exceeding £187 500.
This scheme allows businesses to pay a fix % of VAT inclusive turnover. However under this scheme, businesses are not allowed to reclaim back VAT on purchases (input VAT). The fix percentage to be paid will be based on the type of business.
Businesses can join the flat rate scheme by making an application with the HMRC at the beginning of a VAT accounting period and businesses can leave the scheme any time by informing the HMRC.
A business must leave the scheme if:
- The total VAT inclusive turnover exceeds £225000 one year after joining the scheme or if the VAT inclusive turnover will exceed the £225 000 in the next 30 days.
- It starts using other special scheme such as the VAT margin scheme.
These 3 schemes above are just 3 out of the 6 scheme available. The other 3 schemes are:
- VAT Retail scheme
- VAT margin scheme
- Tour operators’ margin scheme
We will post another article soon in regards of the last 3 schemes.
The information given above is for guidance purposes only. Any business wishing to adopt any of these above schemes has to seek advice with appropriate bodies.
By Dickens Govender |
