Most business owners prefer setting up a limited company because of its multiple benefits, including separate legal status and limited liability protection. Similarly, VAT (Value Added Tax) is an important aspect of a limited company, and fulfilling VAT requirements is crucial.
However, ensuring compliance with VAT obligations can be complicated. Thankfully, there are various VAT schemes in place to simplify the process of VAT accounting obligations.
Moreover, considering what VAT scheme is best for your limited company can greatly influence your financial efficiency and VAT compliance with HMRC.
Hence, in this blog, we’ll list the different types of VAT schemes and outline which could be the best VAT scheme for a limited company.
In addition, if you are wondering how to create a limited company, read our blog, How to set up a limited company in the UK?
Besides, for learning the benefits a limited company can offer you, go to our guide, Limited Company Advantages and Disadvantages.
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What VAT scheme is best for your limited company?
VAT schemes in the UK cater to different types of businesses, and the one you choose for your limited company essentially depends on your company size, turnover, and nature of business.
If you are wondering what VAT scheme is best for a limited company, choose the one that is most compatible and consistent with your business needs. Hence, let’s review all the schemes to see how they align with your limited company needs based on how it operates:
Standard VAT accounting scheme for a limited company:
If your limited company is well-established and steadily growing, with consistent cash flow and a considerable VAT amount to reclaim, opt for the standard VAT accounting method. This default method provides increased flexibility for reclaiming input VAT and is often necessary as your company’s turnover goes beyond £1.35 million.
A major benefit of standard accounting is that your limited company can claim back the VAT it pays on purchases based on the date on the invoice rather than when it pays them.
Generally, this method is effective if your customers pay promptly.
VAT flat rate scheme for a limited company:
The VAT flat rate is the best VAT scheme for you if your limited company:
- Has a taxable turnover of £150,000 or less;
- It is unlikely to cross that threshold;
- It has minimum VAT expenses to reclaim.
A flat rate scheme simplifies the VAT accounting and allows you to retain a portion of the VAT charged on sales. This is because businesses pay a fixed percentage of their annual turnover to HMRC as VAT. It is essential to know if your limited company’s taxable turnover increases the £150,000 threshold after joining the Flat Rate Scheme, it will have to withdraw from the scheme.
The flat rate scheme is effective for small businesses because it is easier to wrap your head around, requires less paperwork, and streamlines VAT.
Summing up, while this scheme reduces administrative hassles, it limits the company’s ability to reclaim VAT on purchases.
Cash accounting scheme for a limited company:
Since the VAT cash accounting scheme depends on the payment date and not the invoice date, it is immensely beneficial for start-ups and small businesses whose customers are usually sluggish to settle their bills.
Similarly, It ties your VAT payments with the actual receipt of funds, meaning a limited company will have to pay VAT to HMRC only when it has received payment from its consumers. Additionally, this scheme is vital for keeping accurate VAT records that include the actual payment date and the invoice date.
Subsequently, if a limited company faces inconsistent or irregular payments owing to late payments from consumers, the cash accounting scheme is a great option since it offers viable cash flow management.
Annual accounting scheme for a limited company:
When your business has predictable/ steady earnings and reduced administrative and paperwork, the annual accounting scheme is the best VAT scheme for a limited company. For greater clarity, while it’s not ideal or suitable for businesses with fluctuating turnover, it works best for limited companies wanting to streamline their VAT reporting.
A significant advantage of this scheme is that a limited company will have to submit fewer VAT returns over the year than the other schemes, which mandate the standard four quarterly returns. Nevertheless, if you often reclaim VAT from HMRC, you will have to wait a whole year for your repayment. This is because you will only be able to reclaim VAT annually.
VAT margin scheme for a limited company:
As stated above, a VAT margin is the best VAT scheme for a limited company that sells second-hand items, artworks, collectables, or antiques. This scheme allows VAT to be calculated only on the profit margin rather than the total sale price. Furthermore, maintaining detailed records of all purchases and sales is crucial for a limited company under the VAT margin scheme.
VAT retail scheme for a limited company:
A limited company can use the VAT Retail Scheme as long as it runs as a retail business, and its VAT-taxable turnover does not exceed the upper limit of £130 million annually. Moreover, the majority of its sales are made to the public instead of other businesses.
HMRC has three further schemes under the retail scheme (described above) so you can choose the most appropriate for your limited company.
If a limited company qualifies for the retail scheme, its VAT accounting becomes immensely simplified. For example, it eliminates the need to calculate VAT for every sale.
As a result, it is highly beneficial when dealing with high volumes of low-value transactions. Likewise, a retail scheme might be the best VAT scheme for a limited company in terms of time savings, for it simplifies VAT reporting.
It is important to highlight that if the limited company also makes significant sales to other VAT-registered businesses, the retail scheme might not be workable.
Last but not least, it is mandatory for a limited company to keep proper records of purchases, sales, and any VAT adjustments made to ensure compliance with HMRC obligations.
Final thoughts:
In summary, the VAT accounting schemes unarguably simplify the calculation and reporting process for VAT. Yet, the concept of VAT and tax can be a bit of a head-scratcher at times. Particularly, when time is of the essence, delving into the details might not be your cup of tea.
That is why Accountingfirms can help your business by explaining what exactly VAT is and what VAT scheme is best for your limited company. Hence, get a thorough consultation with the most appropriate accountant for your business with us today.
Disclaimer: The information provided on AccountingFirms.co.uk is for informational purposes only and should not be considered as financial advice. Always consult with a professional accountant to ensure compliance with UK laws and regulations.