Essential Feature
VAT accounting
schemes for small
Business
Vat is often unpopular with small businesses
both due to the administration burden & for
those businesses selling to the public (B to
C), rather than to other businesses (B to B)
the fact that Vat on sales price may not be
able to be passed on to the customer if you
wish to remain competitive.
Special VAT accounting schemes for small
businesses have been available for a number
of years, to lessen the burden of the tax, but
they are still underused. The 3 main schemes
are: cash accounting, annual accounting and
the flat rate scheme.
The cash accounting scheme (CA)
Cashflow can often be a headache for
businesses. Were it not for this scheme, VAT
would be due based on invoice dates, which
means paying HMRC on unpaid invoices
at the end of each period. CA enables
businesses to account for VAT on the basis of
payments received and made instead.
CA can be used by businesses with an
expected taxable turnover not exceeding
£1,350,000 in the next 12 months. The
business must also be up to date with its VAT
payments or have agreed a plan with HMRC
for clearing any outstanding debts.
The key factor in deciding whether or not to
use CA is the period of time between issuing
sales invoices and receiving payment - the
longer the gap, the stronger the case for CA.
Clearly, it would also not be advantageous
for repayment traders to use it where input
tax regularly exceeds output tax.
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There are other conditions for using the
scheme, but these are not usually prohibitive.
The annual accounting scheme (AA)
AA was introduced at the same time as CA
and has the same turnover thresholds for
joining and leaving it. It involves making
pre-agreed payments on account and
completing only 1 VAT return per year. So its
purpose is to aid cashflow and budgeting.
Benefits of AA:
with an extra month for submission
time as the annual accounts
partial exemption schemes.
The regular budget payments are usually:
previous year’s VAT payments, commencing
on the last day of the fourth month of the
VAT year, or
the previous year’s VAT payments .
The annual return then shows actual VAT due
for the year then ending and the balancing
amount, less the budget payments already
made, is due no later than 2 months after
the return date. Payments must be made
by direct debit, or by a choice of electronic
payment methods.
The flat rate scheme (FRS)
FRS was introduced more recently than the
other 2 schemes. Its objective is to reduce
the cost of VAT compliance. It does this by
applying a fixed percentage to gross income,
which builds in an allowance for deemed
input tax, thus avoiding the need for detailed
records of purchases and expenses. Invoices
Nine issues in Culcheth Lymm Great Sankey & Penketh Chapelford Stockton Heath & Appleton
Thewlwall, Grappenhall & Latchford Birchwood Lowton & Golborne Newton-le-Willows