Comparing Special VAT Regimes

VAT Returns – what’s your Flavour? 

The individual practice may qualify for a flat-rate VAT scheme based on the industry standard rate as a percentage of VAT-inclusive payment receipts to the value of total VAT-inclusive turnover for the first year of registration (a 1% discount is offered for the year of registration).  

Entry to the flat-rate VAT scheme will be dependent on the business’s VAT-exclusive taxable turnover not being expected to exceed £150,000 in the ensuing 12 months. If a trader has limited costs, the flat rate will be 16.5% of VAT-inclusive turnover. A limited cost trader is one whose purchases of goods are less than either: 2% of turnover, or £1,000 p.a. As regards input VAT, if it is incurred on the acquisition of larger fixed assets (those with a VAT-inclusive cost over £2,000), this can be paid back through the VAT Return. 

Under the Annual Accounting Scheme, the trader pays 90% of the preceding year’s VAT liability (or of an estimate if this is the business’s first year of trading) in nine equal instalments over months 4 to 12 of the VAT year i.e. per quarter. The residual balance is processed two months after the end of the reporting period. Alternatively, the trader may opt to pay 25% of the preceding year’s liability, with the residual balance due with the return within the same timeframe. 

Traders only qualify for the Annual Accounting Scheme if all returns and VAT payments are up to date or where instalments have been scheduled with the tax authority. A further condition is that VAT-exclusive taxable turnover is not forecast to exceed £1,350,000 in the ensuing year. One advantage of the scheme is that paying a fixed amount on each instalment helps manage liquidity risks to the business, and reduces admin overheads. 

The Cash Accounting Scheme enables businesses to override the tax point rules where VAT can become due either on the delivery of goods or services, or at the point the invoice relating to those services is issued. VAT can instead become due only on the basis of tangible payment receipts. As with the Annual Accounting Scheme, future turnover must not exceed £1,350,000 for the next year. 

Advantages of the Cash Accounting Scheme are that output VAT does not become an HMRC liability until payment has been made, helping scheme members to tie their reporting obligations to cashflow rather than salesbook forward orders, with an inbuilt protection against default or delinquency on outstanding accounts due to the merchant, as the liability does not come into force until payments have actually been received.