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VatChat 3 – Special VAT schemes available to UK firms

May 1, 2014

HMRC have provided a range of special schemes that apply to smaller businesses. They are designed to reduce administration, but also (in some cases) to assist cash flow.

Under conventional rules, a business has to issue a VAT invoice for every transaction, account for VAT on the date of the invoice, aggregate and pay VAT on all invoices issued; and make quarterly VAT Returns. If an invoice is not paid, Bad Debt Relief (BDR) is available, but only after 6 months have elapsed. These schemes provide some relaxation of these standard rules.

Cash Accounting allows the business to account for VAT only when the invoice is paid. Thus, this helps cash flow and provides automatic Bad Debt Relief. On the purchases side, you can only claim VAT when you have paid an invoice. The scheme is available on turnover up to £1.35million. No application to HMRC is necessary.

Annual Accounting allows the business to submit a single VAT Return each year. It requires the making of interim payments (which is good for cash flow, especially for a growing business). It is available for turnover up to £1.35million. Application is made to HMRC on form VAT600(AA).

You can use Cash Accounting and Annual Accounting at the same time.

The Flat Rate Scheme is available for businesses up to £150,000 in turnover. Under this scheme, invoices are issued in the normal way. However, VAT is accounted for based on money received, multiplied by a fixed percentage, based on the type of business. There is no provision for claiming VAT on expenses (except certain capital items). This scheme reduces administration, and often offers cash savings over conventional accounting. Application is made on form VAT600(FRS).

Retail Schemes are available to businesses whose customers are largely private individuals. There is no need to issue VAT invoices (unless requested by the customer). VAT is calculated based on sales made. Where sales are made at more than one rate of VAT, the calculation will take that into account. A number of different Retail Schemes are available. No application to HMRC is necessary.

HMRC Notices 731 (Cash Accounting), 732 (Annual Accounting), 733 (Flat Rate Scheme), 727 (Retail Schemes) provide more information.

Further Information

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Disclaimer: these VATChat articles are brief introductory comments on some areas of VAT, You will appreciate that whilst every effort is taken to ensure accuracy, your own circumstances may be sufficiently different, such the VAT outcome is not the same. Therefore please do not rely on the article as ‘professional advice.’ In all cases it is recommended that you seek advice applicable to your own situation.