Can a different VAT scheme help your business?

09 October 2006

Cash Accounting

Businesses whose vatable turnover is £660K or less (this is rising to £1.35 million from 1 April 2007) are eligible to use cash accounting. Once in the scheme, there is an upper limit of £825K before a business has to leave. The prime benefit is that VAT is only accounted for on sales when payments are received, so it is especially useful for businesses that are VAT payers with debtors issues.

Conversely, with the exception of qualifying Hire Purchase contracts (where VAT may be claimed upfront depending on the asset being purchased), VAT can only be claimed on purchases when payment is made, so businesses with long credit terms or who are repayment businesses may not benefit. However, whilst cash accounting does have some conditions it is an easy to operate scheme which does not require formal application but which can greatly assist cash flow since it removes debtors from your VAT returns.

Advice: Consider whether cash accounting will benefit your business and review the position periodically

Annual Accounting

A greatly under-used scheme designed specifically to assist businesses manage their cash flow more effectively, annual accounting is particularly useful for growing businesses that are VAT payers where the turnover is less than £1.35 million (although once in the scheme, there is an upper limit of £1.6M before a business is excluded). Start up businesses can use the scheme if their projected turnover is less than £150K in year one.

The benefit of the scheme is that growing businesses pay nine equal monthly installments or three equal quarterly installments based on the previous year’s net VAT due, and so can plan VAT payments more effectively. At the end of the year, a business has two months to lodge the 'annual VAT' return and pay any balancing figure – the installments for the following year are then based on the annual return figures.

Annual accounting needs to be authorised but is a great tool for fledgling and growing businesses to manage cash flow, as at the outset of a year a business can project the actual installments due whilst of course monitoring the performance prior to the annual return being submitted. A word of advice; if major capital expenditure is planned, it is worth undertaking this and claiming it back prior to entering the scheme otherwise a business would have to await the annual return to claw back the VAT on this.

Advice: Consider your business's cash flow and growth projections and consider whether 'known' fixed installments are likely to assist that growth

Flat Rate Scheme

This is available for businesses with an annual turnover of less than £150K excl. VAT and £187,500 incl. VAT, and is based on VAT being accounted for on a percentage of turnover dependent on trade classification. It can be useful in reducing admin costs and can actually save VAT. In essence VAT at the specified percentage is applied to all sales (be they usually standard rated, zero rated or exempt) but no input VAT on individual costs of less than £2,000 is claimed. My advice for businesses considering using the flat rate scheme is to calculate how much VAT would be paid using both the scheme and conventional VAT returns since it can make a substantial difference. Try using the VAT flat rate reckoner from the downloads section of our website for an initial appraisal of whether this may be beneficial to your business.

Advice: Compare the likely VAT due under the flat rate scheme and under conventional VAT accounting prior to adopting the flat rate scheme using CRM’s VAT flat rate reckoner.

Retail Schemes

Similarly, with retail schemes savings can be made by regularly reviewing (say annually) which scheme is used since alternative schemes can throw up surprisingly differing results.

Advice: Regularly review whether the retail scheme used is favourable administratively and commercially and compare to other methods.

Tax Points

Tax points can be effectively used in various ways and what follows are some of the more common angles. Basic tax points occur when goods are delivered/made available to a customer and services when they are completed. However, these are overridden when an invoice is issued within 14 days of the basic tax point – it is thus worth planning when to invoice, particularly around VAT quarter ends.

In addition, there are certain circumstances where businesses can control the tax point. For example, where there is a continuous supply of services (for example, the renting of land or equipment), a tax point is only created when an invoice is raised or payment received (whichever is earlier) and even then the use of ‘requests for payment’ or 'pro-forma' invoices does not create a tax point. For goods supplied on sale or return, no tax point occurs until the customer 'adopts' the goods or 12 months elapses.

Advice: Review your business’s VAT accounting procedures and see whether there is any opportunity to plan more effectively when VAT is due.