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
The cash accounting scheme for VAT 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
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.
Flat Rate VAT Scheme
The Flat Rate VAT 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
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.
About the author
This bulletin was written for ByteStart by Les Howard of VATadvice.org.
More on VAT
For more information on VAT read ByteStart’s other guides;
- ByteStart’s guide to Value Added Tax (VAT) for start-ups and small businesses
- VAT registration – when should you register for VAT?
- Flat Rate VAT Scheme – an overview for small businesses
- What is the VAT cash accounting scheme?
- Why you must check if a VAT registration number is valid, and how to do it
