GMT Accounting Ltd

VAT Schemes Explained

What is VAT?

VAT stands for Value Added Tax and is a form of indirect taxation used by the Government to raise income.

VAT is charged on most business-to-business and business-to-customer transactions. Businesses must register for VAT when their “taxable turnover” exceed the “VAT threshold”, which currently stands at £85,000. Some businesses opt to register for VAT before they reach this threshold, either to appear as a larger Company to potential customers or utilise a VAT scheme to potentially make big savings each year.

There are currently three rates of VAT and these are:-

  1. Standard Rate (20%) – most goods and services are subject to VAT at the standard rate.
  2. Reduced Rate (5%) – examples of items that fall into the reduced rate category are domestic fuel and power, residential conversions, children’s car seats.
  3. Zero Rate (0%) – examples of items that fall into the zero rate category are children’s clothing, food (excluding restaurant meals or hot take-a-way meals), books and newspapers, public transport.

There are some items that are not covered by the VAT scheme. These are known as “Exempt” and are things like postage stamps, insurance, education and training.

Finally, there are items which are outside the scope of VAT, such as wages and employee salaries, rates and donations to charities.

Different VAT Schemes

When a business registers for VAT there are a number of schemes available, the main ones are:-

  1. Standard Scheme – VAT is accounted for on your sales and purchases on the date of invoices and VAT is paid quarterly to HMRC. This can sometimes cause cash flow issues if some of your invoices are not paid promptly.
  2. Cash Accounting Scheme – With cash accounting you don’t pay the VAT until you’ve been paid and, in the same way, you don’t reclaim VAT on purchases until you have paid for them. This can help with most of the cash flow problems mentioned with the standard scheme.
  3. Annual Accounting Scheme – With annual accounting, you only submit one VAT return per year. You make payments to HMRC in nine monthly or three quarterly instalments with a balancing payment or refund when your VAT return is submitted. The instalments are based on the previous year’s VAT or an estimate from HMRC. Again, this scheme can help with cash flow.
  4. Flat Rate Scheme – This can save businesses a lot of money depending on which industry they operate in. Based on your industry you will be given a flat rate somewhere between 4 and 14.5% and this rate is then used to calculate the VAT due as a fixed percentage of your sales. You don’t claim back the VAT on purchases except for certain capital purchases over £2,000. You keep the difference between what you charge your customers and what is paid to HMRC.

There are a number of things to consider when deciding which VAT Scheme is best for your business. If you would like to know the best scheme for you get in contact and we can help you decide as well as help you register with HMRC.