You literally could not make a duller sounding title. So please, stay with us!
VAT’s VAT, surely? Well, yes and no. There’s a “Standard” scheme which most businesses are on, but don’t let HMRC tell you how to handle your VAT. There’s a number of alternate schemes which you might qualify for.
To make things extra exciting, you can sometimes qualify to be on two different schemes AT THE SAME TIME. 🤯
Oh, and if you’re not yet registered for VAT and wondering if you’d be better off doing so (even if you don’t HAVE to) then check out our article about this.
But before we take a stroll through the different schemes available, let’s take a moment to recap on what “normal” looks like.
Standard Accounting for VAT
This is the most common method, and unless you apply for something different, it’s where you’ll start. You keep track of the VAT you pay on purchases and the VAT you charge on sales, and pay (or reclaim) the difference from HMRC each quarter.
Everything is done based on the invoice date. So, if you send your customer an invoice dated March but they don’t pay it til May, you’ll end up paying the VAT over to HMRC before your customer has paid you.
On the flip side, you’ll get to reclaim the VAT on supplier bills, even if you’re pretty slow to pay your suppliers. So it’s swings and roundabouts – depending on how quick you pay suppliers vs get paid from your customers, this might be the best scheme for you.
Or it might be a disaster. That’s why you have an accountant to work all this stuff out.
Flat Rate Scheme for VAT (FRS)
This scheme is designed to make VAT accounting easier. But to be honest, it’s not that useful these days. It harks back to an age when people were keeping manual records rather than using accounting software, which used to be really expensive. But now it’s cheap as chips, so if you are still using manual spreadsheets or ledgers in your business…we need to talk!
With the FRS, instead of calculating the difference between VAT on your purchases and sales, you simply pay a percentage of your annual turnover to HMRC. That % is set by HMRC depending on the industry you’re in.
Although you NORMALLY don’t reclaim any VAT on your purchases, you’ll be pleased to know that if you really dig deep, and buy equipment (such as a van, a piece of machinery or a fancy laptop) costing over £2,000 you can make an application to reclaim that VAT.
The idea is that, overall, you’ll pay there-or-thereabouts the same amount of VAT on the FRS than the Standard scheme. You just spend less time chasing suppliers for VAT invoices.
So, in a world where recording income and expenses is so simple…why use this scheme? Here’s the truth: once you’ve got a few months’ trading under your belt (and you’ve recorded all your expenses properly), your accountant 🙋♂️ can run some numbers to work out if you might be a little better off until the FRS.
For example, if you’re an IT repair shop, you’ll pay 11% of your turnover. Accountants pay 14.5%. And, for reasons lost in the mists of time, if you join the FRS in your first year of being VAT registered you get a 1% discount off your FRS % rate. Hence, some businesses do this for the first year of being VAT reg’d, before going back to ‘normal’.
Remember, even if you’re using accounting software and recording every single purchase, you can still use the FRS. Where beneficial, we advise clients to use it as a tax-saving rather than a time-saving exercise (although it may be both of those things!).
But be careful! Once you join the scheme you need to wait at least 12 months to leave it. So do, please, take professional advice before you make the leap.
Oh, and if you’re turning over more than £150,000 a year then this scheme isn’t for you.
Cash Accounting Scheme
Normally, VAT is calculated based on the invoice date, but with cash accounting, it’s based on the payment date. This means you only have to pay VAT when your customers pay you, and you can reclaim VAT on purchases once you pay your suppliers.
Could be good for you – if your customers are slow to pay – but if e.g. you’re running a retail outlet where people pay you up front and you take a month or two to pay suppliers, you’ll probably be worse off.
Again, get your accountant to run the numbers on whether you’re better in or out. If you’re heading places, and turnover is north of a million quid, then you might not be able to join – and you’ll need to leave the scheme if turnover hits £1.6M
VAT Margin Schemes
This is a pretty niche one, but if you sell second hand goods, picture this:
You buy a car/antique/piece of equipment for £10,000 from a seller. They’re a private individual, so they don’t charge you VAT and you don’t pay it. You tart up the car a bit, give it some TLC and put it out for sale for £15,000.
When you sell it, that’s £12,000 including VAT of £2,000 – after you’ve paid the VAT to HMRC you’re left with a profit of… absolutely zilch. 🙈
To get around this issue, you can use the margin scheme. Here, you only pay VAT on the profit element of the sale. So, that car still gets sold to the customer at £12,000 but now you’ll only pay VAT on the profit. So, £1,667 + £333 VAT @ 20% = £2,000.
You’re now paying the same amount of VAT as if you’d bought the car from another dealer who charged you £10K including VAT. 💡
Trust me, you only want to use the margin scheme if you have to. Because you need to record the profit on EVERY item you sell. If you mainly buy from wholesale/dealers and have the occasional private (and non-VAT) purchase, it may be better to take the hit on the chin for the time and hassle it’ll save you.
If most of your goods are purchased from private sellers, give us a call and we can talk you through this scheme in more detail.
How can Accountants help?
Getting your VAT right is a minefield in itself. Even on the standard scheme there’s a myriad of rules and exceptions. Things get even messier on the other schemes.
BUT where there’s muck there’s brass, and a professional review of your VAT position could be a valuable investment. We offer a VAT review service for £140 + VAT, and it’s available to non-clients as well – whether you’re doing your own VAT, or if you just don’t trust your current accountant 😬
Email firstname.lastname@example.org for more details.