A limited company is a type of business structure in the UK that protects the personal assets of the business owners from any debts or financial risks. Likewise, it confines the owner’s financial and legal liability to their investments. Let’s discover different types of VAT schemes in the UK.

For a detailed study on how you can leverage a limited company, read our blogs: How to set up a limited company in the UK?

Limited Company advantages and disadvantages.

Moving further, for a limited company, fulfilling the VAT regulations is crucial for ensuring compliance with HMRC and ensuring the smooth execution of operations.

VAT is a consumption tax charged on most goods and services in the UK, and it registration becomes mandatory when a company’s taxable turnover exceeds the threshold of £90,000 within a 12-month period.  Furthermore, there are different VAT schemes to calculate and report VAT on all sales and purchases of a limited company.

Therefore, this blog lists different types of VAT schemes and elaborates on how they can significantly affect your company’s cash flow, VAT submissions,  and administrative workload.

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Different types of VAT accounting schemes: What is the purpose?

VAT-registered businesses must report and pay VAT on the entire value of everything they sell. Likewise, they can also reclaim any VAT they have paid on business-related goods and services.

The VAT amount a business pays or reclaims from HMRC generally consists of the difference between the VAT amount it charges to its consumers and the VAT amount it pays on its own purchases from suppliers.

To know more about VAT requirements, read our guide: What are the VAT requirements for a Limited Company?

Notably, although VAT applies to almost every business transaction in the UK, there are different ways to calculate them. 

Thus, the methods by which a VAT-registered business can calculate and report the VAT payments on its goods and services are called VAT accounting schemes.

The scheme under which you do so depends on the type of business entity, the nature of its business,  and its annual turnover. More crucially, VAT schemes streamline the way a business entity (like a limited company) submits its VAT returns.

If you want to know which scheme could be the most useful for your business, go to our blog: Which VAT scheme is best for your Limited Company?

Understanding the different types of VAT schemes

The following are the different types of VAT schemes, considering which you can determine what VAT scheme is best for your limited company:

 Standard VAT accounting method:

The standard VAT accounting scheme is the standard VAT accounting method. It is a default method for VAT-registered businesses. That is, the businesses whose annual turnover crosses the VAT registration threshold become the VAT-registered businesses.

Under the standard accounting method, you maintain a detailed record of the VAT on all your purchases and sales. Notably, the VAT bill is the difference between the VAT you charge customers and the VAT you pay for your purchases. For greater clarity, the VAT due is calculated based on the invoices you issue (output VAT) and the invoices you receive.

Input VAT:

The invoices you receive or the VAT paid on purchases is called input VAT.

Output VAT:

By contrast, the issued invoices or the VAT charged to consumers is called output VAT. 

Moreover, while you can charge VAT on your sales, you can viably reclaim VAT on your purchases. 

If a business entity charges more VAT to consumers than it pays on its purchases, it must pay the difference to HMRC. On the contrary, if a business pays more VAT than it charges its customers, it can reclaim the difference from HMRC.

Beyond that,  you submit your VAT returns to the HMRC quarterly. The returns are submitted after calculating the exact VAT due to HMRC. 

VAT flat rate scheme:

Unlike the standard VAT accounting scheme, the Flat Rate Scheme was launched to make VAT accounting streamlined and efficient. This scheme is far easier to manage than the standard method since you are not required to keep a record of VAT on all your transactions.

With the flat rate scheme, instead of calculating and reclaiming VAT on individual purchases, businesses pay a fixed percentage of their annual turnover to HMRC as VAT. Likewise, the percentage differs according to the sector in which the business works. 

However, signing up for the flat rate scheme means you cannot reclaim the VAT you pay on purchases. However, there are a few exceptions for capital assets valued over £2,000, which allow you to reclaim VAT. 

Key considerations for using the flat rate scheme: 

• Your business must be VAT-registered to be eligible to use the scheme.  
• When your company turnover is £150,000 or less, excluding VAT, you can qualify for the VAT flat rate scheme. 
• The business that wants to avail of the flat rate scheme must apply to HMRC first. 
• You will receive a 1% discount on the flat rate if you use the scheme within your first year of VAT registration.

Specifically, when you generate your invoices, you don’t charge your consumers the flat rate. Conversely, you charge the normal rate depending on what you supply. Therefore, you can simply use any of the three applicable VAT rates, like  20%, 5%, or 0% rate.

VAT annual accounting scheme:

If your business has a turnover of £1.35 million or less, you qualify for using the VAT annual accounting scheme. Unlike the standard accounting method, the annual accounting scheme allows you to file just one VAT return annually rather than the normal four quarterly filings.

Moving ahead, you can make predicted or estimated advance payments for your VAT according to previous VAT returns. In addition, you can request a refund for any overpayments.

VAT Cash Accounting Scheme:

If your limited company is facing extended payments or cash flow fluctuations, the VAT cash accounting scheme might be the most feasible and workable option for you. It is because this scheme binds your company’s VAT liability to actual payments.

The Cash Accounting Scheme offers cash flow advantages for small businesses that are not performing as they anticipated. Under this scheme, VAT payments to HMRC are based on cash flow rather than the date of invoices issued or received.

To clarify, businesses have to pay VAT to HMRC only when they have received payment from customers. However, it works the other way too. For instance, you can only reclaim VAT on purchases after you have paid your suppliers. 

Beyond that, businesses with an annual taxable turnover of £1.35 million or less can use this scheme. In particular, you can keep operating this scheme as long your business taxable turnover remains below £1.6 million.

VAT retail scheme:

Fortunately, for businesses selling goods, a VAT retail scheme is the most feasible one among different types of VAT schemes. There are three further schemes under the scope of the VAT Retail scheme to facilitate retailing businesses. To further explain, rather than calculating the VAT on each sale, this scheme allows you to calculate VAT only once with each VAT return.

However, the retailing businesses must calculate the correct VAT amount they need to record. To illustrate, if you sell goods that include VAT, you must deduct the VAT you need to record. On the contrary, if you sell goods exclusive of VAT, you must include the VAT.

Furthermore, the following VAT Retail schemes are created to streamline the  calculation of the accurate VAT amount: 

Point of Sale Scheme:

This scheme enables you to Identify and record VAT at the time of sale.

You can do it through an electronic cash register. Lastly, add the VAT for all the sales and report this amount to HMRC.

Apportionment Scheme:

You can use this scheme only when buying goods for the purpose of resale. It is relevant to mention that businesses must follow the following steps to calculate the accurate VAT amount: 

• Firstly, you must calculate the entire purchasing value of the goods bought for reselling. 
• Secondly, determine the applicable VAT rate, such as whether 20% or 5% VAT rate is applied.
• Thirdly, divide the total purchase value by the VAT rate divisor. For instance, if the goods are taxed at 20%, divide the total purchase value by 6. Similarly, if the goods are subject to a 5% VAT rate, divide the total purchase value by 21. It is worth pointing out that these divisors come from the VAT percentage formulas and simplify the calculation.
• Fourthly, multiply the result obtained from step 3 by the total sales value of the resold goods.
• Lastly, the outcome achieved is the VAT amount you will have to pay to HMRC under this apportionment scheme.

Direct Calculation Scheme:

This scheme applies when you have a small number of sales under one VAT rate and the majority under another.

Notably, if your turnover crosses £130 million, excluding VAT, you must sign up for a unique retail scheme with HMRC.

VAT margin scheme:

If your limited company deals in the selling of second-hand items, artworks, collectables, or antiques, you can sign up for a VAT margin scheme.

With the VAT Margin scheme, rather than paying VAT on the full selling price, businesses are taxed on the difference between the purchase price of the item and its selling price. The difference between the two is called the margin and is taxed at a specific rate of 16.67%. 

Fortunately, no registration is required to use the VAT margin scheme. However, you must maintain accurate records and submit VAT returns electronically within the standard time periods, as is the case with all VAT returns.

Notably, there are a few exceptions to this scheme. For instance, it is inapplicable for selling second-hand vehicles, pawned objects, houseboats, horses, and high-volume low-value sales. Other than that, different rules also apply to auctioneers and sales including the import and export of goods to countries outside the UK. 

Consequently, it is always wise to consult an expert before deciding what VAT scheme is best for your limited company. 

Conclusion:

In a nutshell, there are different VAT schemes created to cater to businesses with varying sizes, turnovers, and business operations. These schemes simplify VAT calculations, make your VAT payments compatible with cash flow, and provide streamlined reporting options.

Yet, VAT registration and choosing the right scheme can become challenging at times. However, with the help of a skilled accountant, such as those listed at Accountinfirms, VAT-related matters become manageable and hassle-free. Thus, ensure VAT compliance with HMRC while maximizing financial efficiency and operational ease with us.

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.