VAT Accounting Schemes for UK Entrepreneurs
- Modified: 17 October 2023
- 9 min read
- Tax & VAT
Gabi Bellairs-Lombard
Business Writer
Gabi is a content writer who is passionate about creating content that inspires. Her work history lies in writing compelling website copy, now specialising in product marketing copy. Gabi's priority when writing content is ensuring that the words make an impact on the readers. For Osome, she is the voice of our products and features. You'll find her making complex business finance and accounting topics easy to understand for entrepreneurs and small business owners.
VAT accounting schemes in the UK aim to streamline business tax processes through simplified and tailored approaches to VAT compliance. For small businesses, this may be confusing — we’ll help you decide which VAT annual accounting schemes are the best fit for you.
What Is VAT Accounting, and Why Do I Need It
Congratulations! You have passed your earning threshold, and your business is registered for VAT in the UK. You must choose how to manage your tax and notify the government of the total VAT amount you have charged and paid. These methods are called VAT accounting schemes.
VAT registration and accounting is a legal obligation. HMRC can charge hefty fines for failure to account for VAT accurately. To avoid strict penalties, you must ensure your returns are done correctly and on time. Having an experienced accountant do your VAT taxes is the easy way to stay organised.
If you are not yet registered for VAT, talk to our Osome experts so they can explain how to get this setup.
The essential VAT guide for SMEs in the UK
We covered all you need to know about VAT: VAT rates, registration for VAT, and the best VAT schemes for your business in the UK.
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Choose Your VAT Scheme Wisely
There are a few different methods to pay VAT to HMRC. Different Accounting Schemes will be suitable for certain types of businesses, and the size of the business can affect your scheme choice. Osome’s accounting services and experts work with clients in different industries, so they know how to choose the best VAT scheme for you. Here's an overview of each option.
Standard Accounting Scheme
Keep a detailed record of all VAT you charge on each sale - and the VAT you pay with each purchase as a result. This scheme requires businesses to record VAT on the date of issuing or receiving a new VAT invoice, regardless of when it is paid. Refunds are paid quarterly. This scheme is less commonly used.
Flat Rate Scheme
This only applies to businesses with an annual turnover of less than £150,000. Small businesses and sole traders most commonly use it because it is easiest to understand. You pay a fixed percentage of your turnover to HMRC each quarter. And you don't need to record VAT that you charge customers or pay yourself. Note that with the Flat Rate Scheme, VAT can only be reclaimed on some capital goods that cost over £2,000.
Annual Accounting Scheme
This scheme is only suitable for businesses with a yearly turnover below £1.35 million. You pay VAT every quarter based on the most accurate estimates and only submit one VAT return each year.
You either pay nine monthly payments amounting to 10% of the previous year's VAT payments (10% of the previous year's estimated VAT payments if you've been registered for less than one year.)
Or your business can apply to pay three quarterly payments totalling 25% of the previous year's VAT payments. However, this scheme is only for some - short term losses must be considered. The Annual Accounting Scheme would be unsuitable for companies who have to claim back VAT regularly. While submitting a VAT Return once a year saves time, you can only reclaim your VAT for your business once a year.
Cash Accounting Scheme
This scheme is also suitable for businesses with a turnover of £1.35 million per year, this scheme means that you pay VAT on all sales (provided the customer has paid you) as well as reclaiming VAT on any purchases (provided you have paid the supplier). The Cash Accounting Scheme requires businesses to record income when it's received and record expenses when they are paid. This scheme is more beneficial than the Standard VAT Accounting Scheme if customers regularly pay late. However, startups making initial investments in new equipment (and purchasing this on credit) should avoid the Cash Accounting Scheme, as you cannot reclaim VAT until you have paid the supplier.
FAQ
When should you register for VAT?
When it comes to VAT for small businesses, you should register for it when the taxable turnover of your business exceeds £90,000. There are three types of VAT in the UK – standard, reduced, and zero-rated.
Your company’s taxable turnover is the total value of the items sold that are not VAT-exempt.
You can also register your business for VAT voluntarily.
It is mandatory to register for VAT if:
- The taxable turnover of your business is likely to be over £90,000 in the next 30 days.
- The taxable turnover of your business has been more than £90,000 over the last 12 months.
Depending on what types of products or services you sell and where, you may also need to register in a few other cases.
After the registration, HMRC will send a VAT registration certificate along with your:
- VAT number
- Details of your first VAT return
- The effective date of VAT registration
You will not be able to charge or show VAT on your business invoices until you get your VAT number. However, you may still have to pay VAT for that period.
What is postponed VAT accounting, and how does it work?
Since January 1, 2021, businesses registered for VAT in the UK that import goods into the country from any part of the world can implement postponed VAT accounting.
Postponed VAT allows businesses to carry out VAT accounting on their VAT Return instead of paying the due immediately.
The objective of implementing postponed VAT accounting is to avoid any cash flow interruption of a business when importing.
This is how postponed VAT accounting work
When importing, VAT will be considered on the VAT Return, and you must fill three boxes out of the 9 boxes.
According to HMRC, business owners need to fill out the following sections:
Section 1: Pending VAT on sales/other transactions – Consider the VAT pending for a certain period on imported items via postponed VAT accounting.
Section 2: VAT reclaimed on purchases – Consider the VAT you recovered for your business on imported items via postponed VAT accounting during this period.
Section 3: Total purchase value/various other inputs excluding VAT – Consider the overall value of all the items imported and included in the monthly statement, excluding VAT.
If you do not use this accounting scheme and instead pay the VAT when importing goods, you need to fill out box number 4 and 7 only.
Please remember that you cannot manually adjust these values in the VAT return section under the Making Tax Digital section. You need to record these in your accounting software.
Managing postponed VAT accounting using the monthly digital statements will be easier. These statements will only show the postponed VAT in the month before. You will not be able to charge or show VAT on your business invoices until you get your VAT number. However, you may still have to pay VAT for that period.
When does your VAT accounting period end?
Your VAT accounting period comprises 12 months. Your VAT return will be due once a year, two months after the end of your accounting period. However, the due date will differ if you are using any of the VAT accounting schemes, especially the VAT annual accounting scheme. Businesses now have to maintain digital records for VAT records and use software to submit VAT Returns.
Payment deadlines
You need to pay VAT in advance towards your monthly or quarterly VAT bill during the accounting period and make a final payment when submitting your VAT Return.
- Monthly: pending at the end of months 4, 5, 6, 7, 8, 9, 10, 11 and 12
- Quarterly: pending at the end of months 4, 7 and 10
- Final payment: within 2 months of month 12
If you need more clarification about the deadline of your VAT return, log into your online account, and select the checkbox to receive timely reminders regarding your outstanding VAT date.
What is VAT cash accounting?
There are different VAT schemes in the UK, and VAT cash accounting is one of them.
VAT cash accounting scheme enables you to include your VAT (output tax) on your total sales based on the payments you receive instead of the tax invoices you issue.
If you use this scheme, you can only reclaim the VAT paid on your purchases (input tax) after you pay the supplier.
How the VAT cash accounting scheme is helpful for your business
The VAT accounting scheme can help the cash flow of your business. It is because, generally, you need to pay VAT to HMRC when receiving payments from your customers.
This scheme can be beneficial if you regularly offer credit extensions to your customers and incur significant bad debts.
However, this scheme may not be beneficial for you if:
- You receive payments right after selling something.
- You recover more VAT amount than you pay.
- You provide services continuously.
If you realise that the scheme does not benefit your business, you may end it once your VAT accounting period is over. Subsequently, you can get back to the regular method of VAT accounting.
What is the VAT Flat Rate Scheme?
A VAT flat rate scheme is one of the VAT rate schemes for which you need to pay a flat rate VAT to HMRC.
The purpose of this scheme is to simplify the VAT return process for small businesses. It ensures that businesses pay almost the same amount of VAT without completing a lot of paperwork like other VAT schemes.
In the VAT flat rate scheme:
- You pay VAT at a fixed rate to HMRC.
- You will keep the difference between what you receive from your customers and pay to HMRC.
- You cannot recover the VAT on the items you purchased, except for specific capital assets worth more than £2,000.
To use this scheme, the VAT turnover of your business must be £150,000 or less (excludes VAT), and you need to apply to HMRC.
How to change the VAT scheme?
At some point, you may want to change your VAT accounting scheme. For example, if you currently use the flat rate VAT scheme, you can change it to the VAT cash accounting scheme, standard VAT scheme or VAT accrual scheme.
According to HMRC, you can only change your VAT annual accounting scheme at the beginning of a new accounting period.
Steps to change the VAT scheme:
a. Go to More, then click Settingsb. In the Financial Settings, click Account Dates & VAT.
c. Enter the information mentioned below:
- Select the new VAT Scheme.
- Choose the intended frequency of submitting your VAT Return to HMRC.
- Put in your VAT number.
- If changing to a flat or standard rate scheme, mention the percentage.
- If you are changing from “not registered,” put in HMRC user ID for the Government Gateway.
- Click Save.
Now, you have successfully changed your VAT scheme. The system will capture relevant transactions according to the new scheme during the next VAT return.
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