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Saving your small business time and money by simplifying VAT

| Simon Shaw | 14 December 2021

There are various ways a small business can account for VAT, are you using the right one for you.

VAT registration is a question that all businesses need to consider, whether they are currently registered or not. The VAT compulsory registration threshold is currently £85,000 turnover in the last twelve months. Businesses, which are not currently registered, need to keep a close eye on their turnover and ensure they understand the requirements of registration.

The standard VAT method is used by many and put simply, you return all the VAT on your sales and purchases and either get a refund or make a payment for the difference – this is done monthly or quarterly.

The standard method is the default method and might not be the most appropriate for your business. It could be costing you time and money.

There are alternatives to this onerous system as outlined below.

Save time and money and make budgeting easier with the Annual Accounting Scheme

Only one VAT return per year and nine monthly or three quarterly advance payments are made towards the total VAT due. A balancing payment is then made for any owing VAT.

The main benefits of the scheme are:-

  • Only one VAT return is submitted and therefore only one filing deadline in a year reducing the possible occurrences of late filing penalties
  • You know what the interim payments are going to be and this can help plan your cash flow
  • The VAT return is submitted two months after the year end instead of the usual one month

The drawback of using the Annual Accounting Scheme is that if there are significant changes in the business or capital expenses during the year, the amount of VAT paid on account might be excessive.

This scheme is available to businesses with a turnover of less than £1,350,000

If you have customers who owe you money, take the cash flow advantage of the Cash Accounting Scheme

With the Cash Accounting Scheme businesses only account for VAT when a customer has paid an invoice. You will never again have to pay over VAT on money you have not received.

The possible downside of this scheme is that VAT can only be recovered on purchases and costs once paid. It is therefore important that the relationship between monies owing to and owed by the business are considered, to ensure operating this scheme doesn’t create a negative cash flow.

Again, this scheme is available to businesses with a turnover of less than £1,350,000.

Save time and possibly money with the Flat Rate Scheme

Under the Flat Rate Scheme, a fixed rate of VAT will be paid to HMRC which is based on a percentage of gross turnover. The percentage used is based upon your industry sector.

There have been changes to this scheme which mean businesses with limited costs have to use a flat rate of 16.5%. Although using this rate may only save a very small amount of VAT, the simplified method of calculating the VAT due may be attractive to certain businesses.

VAT cannot be claimed on expenses with the exception of capital assets whose VAT inclusive value is £2,000 or more.

The benefit of the scheme is that it reduces the amount of time a small business spends calculating their VAT. You no longer need to worry about recording the VAT on your routine expenditure.

The annual turnover limit for businesses joining the flat rate scheme is £150,000 excluding VAT.

Many businesses have been following the requirements of Making Tax Digital (MTD) for VAT for many years. These requirements are being extended from April 2022 to apply to VAT registered businesses that have turnover below the £85,000 registration threshold. These businesses will need to be getting ready to ensure their bookkeeping system is compatible with the requirements of MTD.

As each business is unique there is no simple answer as to which scheme would be best for your business and therefore the merits of each must be evaluated to ensure it works for you.

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