Understanding VAT Schemes

In our last blog – Understanding VAT Rates we outlined when businesses have to become VAT registered and the amount of VAT that needs to be added depending on the types of products or services that you are selling.

We wanted to explain the different types of VAT schemes that are available so you have a better understanding of which one may be better for your business. We always recommend that you also get advice from your accountant before making a change to ensure that the VAT scheme you choose will reduce your tax liabilities.

VAT annual accounting scheme

If your business has a turnover of 1.35 million or less, you can opt for the VAT annual accounting scheme. With this scheme, you make advance payments for VAT based on either a historical figure or if you a new business an estimated value. You then submit one VAT return in the year. If you have overpaid, you will receive a refund. If you have underpaid, you need to pay the difference.

VAT cash accounting scheme

If your business has a turnover of 1.35 million or less, you can choose the VAT cash accounting scheme. With this scheme, you pay VAT on all sales as you get paid by your customers. For all expenditures, you can reclaim the VAT as you pay a supplier. You submit quarterly VAT returns, but these are based only on payments made or received, so you need to keep a record of payment dates. 

VAT Flat rate scheme

If your turnover is £150,000 or less, you can apply to the HMRC to operate the VAT flat rate scheme. The flat rate of VAT that you pay is determined by the type of business that you run. For example, catering companies, including restaurants and takeaways, would pay 12.5% whereas a printing company would pay 8.5%. You would still charge your customers 20% VAT for all sales, but your payment to HMRC would be at a reduced rate.

VAT margin scheme

For certain businesses such as antique dealers, selling second-hand goods or art sales, the VAT margin scheme is most suitable. In this scheme, you pay tax on the difference between what you bought the item for and the sale price. 

There are, however, some items that you may purchase that do not fall into this scheme, so you need to pay standard VAT for these — for example your business overheads or any parts you buy.

VAT retail scheme

For retailers that sell large quantities of low-cost items or small items which have different  VAT liabilities, the VAT retail scheme helps save them a lot of time. There are three different retail schemes:

• Point of sale scheme
• Apportionment scheme
• Direct calculation scheme

All of these can be used in conjunction with the cash accounting scheme or the annual accounting scheme.

Plus, don't' forget that for all businesses that are VAT registered and over the threshold of £85,000 annual turnover, you need to submit tax digitally. See our blog – Making Tax Digital Update Bulletin.

If you would like to get some advice on which VAT scheme would be best for you please do get in touch. 

You can call 01623 490 120 or email This email address is being protected from spambots. You need JavaScript enabled to view it..