VAT Schemes UK
VAT (Value Added Tax) is one of the most common taxes UK businesses deal with. If you’re VAT-registered, you charge VAT on your sales and pay it to HMRC, but you can also reclaim VAT on your business purchases.
The way you account for VAT can vary depending on your business type, size, and turnover. HMRC has developed several VAT schemes designed to simplify processes and help businesses manage their cash flow.
This guide explains the main VAT schemes, how they work, and when they might benefit your business. We’ll also cover VAT rates and registration thresholds.
VAT Explained
VAT (Value Added Tax) is a tax charged on most goods and services in the UK. If your business is registered for VAT, you must:
- Charge VAT on sales (also known as output tax).
- Pay VAT to HMRC (minus VAT you reclaim).
- Keep proper VAT records.
VAT Rates in the UK
Different rates apply depending on what you sell:
- Standard rate (20%) – most goods and services.
- Reduced rate (5%) – e.g. children’s car seats, home energy.
- Zero rate (0%) – e.g. most food, books, children’s clothes.
- Exempt – no VAT charged, e.g. education, insurance, health services.
👉 Always check HMRC’s list before setting your selling price.
VAT Registration Thresholds
- You must register if your VAT-taxable turnover is over £90,000 in a rolling 12-month period (from April 2024).
- You can also register voluntarily below this threshold – useful if you want to reclaim VAT or appear more credible to customers.
- Registration is completed online via HMRC’s website.
UK VAT Schemes
Below are the main VAT schemes in the UK, which we will explore further:
- Standard VAT Accounting Scheme
- VAT Flat Rate Scheme
- VAT Cash Accounting Scheme
- VAT Annual Accounting Scheme
- VAT Retail Scheme
- VAT Margin Scheme
Standard VAT Accounting Scheme
The Standard VAT Scheme is the default option for most businesses. Under this scheme, you:
- Charge VAT on your sales (known as output tax).
- Reclaim VAT on your purchases (known as input tax).
- Pay the difference to HMRC, or reclaim it if your input tax is higher than your output tax.
VAT returns are typically filed quarterly, detailing all sales and purchases made within the specified period. This scheme provides the most accurate picture of VAT owed, but it may require more detailed bookkeeping compared to simplified schemes, such as the Flat Rate Scheme or the Cash Accounting Scheme.
👉 If you don’t apply for a special scheme, VAT-registered businesses are automatically placed on the Standard Scheme.
VAT Flat Rate Scheme
The Flat Rate Scheme is designed to make VAT easier for small businesses. Instead of working out the VAT on every sale and purchase, you:
- Charge VAT to your customers at the standard rate (usually 20%).
- Pay HMRC a fixed percentage of your VAT-inclusive turnover.
- Keep the difference between what you charged and what you pay to HMRC.
The percentage you pay depends on your industry, and HMRC provides a complete list of rates.
👉 You can join the Flat Rate Scheme if your VAT-taxable turnover is £150,000 or less (excluding VAT). You must leave the scheme if your turnover goes above £230,000 (including VAT).
Pros
- Much simpler record-keeping.
- Easy to predict how much VAT you’ll owe.
Cons
- You can’t normally reclaim VAT on purchases (except certain capital assets over £2,000).
- In some cases, you may pay more VAT compared to the Standard Scheme.
Example
Sarah runs a small graphic design business. Her VAT-inclusive turnover for the quarter is £15,000. As a service business, her flat rate percentage is 14.5%.
- She charges her clients 20% VAT as usual, so her invoices total £15,000.
- Instead of calculating VAT on every expense, she pays HMRC 14.5% of £15,000 = £2,175.
- The difference between what she charges (£2,500, with VAT on £12,500 net sales) and what she pays (£2,175) is retained by her business.
In her first year of VAT registration, she would also receive a 1% discount, reducing her flat rate to 13.5%, which would mean she would only pay £2,025 for the quarter.
Check out the flat scheme and the different rates available; it also includes a calculator to help you determine your potential payment amount.
👉 This scheme is often best for service-based businesses with low expenses.
VAT Cash Accounting Scheme
The Cash Accounting Scheme lets you account for VAT based on when money actually changes hands, not when invoices are issued. This can be a big help for cash flow if your customers take time to pay.
- You only pay VAT to HMRC when your customers pay you.
- You only reclaim VAT on purchases once you’ve paid your suppliers.
👉 You can join the the Scheme if your estimated VAT-taxable turnover is £1.35 million or less. You must leave the scheme if your annual turnover exceeds £1.6 million.
Pros
- Helps cash flow, as you don’t pay VAT before you’ve been paid.
- Reduces the risk of paying VAT on bad debts.
Cons
- You can’t reclaim VAT on purchases until you’ve paid your suppliers.
- Slightly more complex if you mix schemes or deal with large, delayed payments.
Example
James runs a small IT consultancy. In April, he invoices a client £12,000 + £2,400 VAT. The client doesn’t pay until July.
- Under the Standard VAT Scheme, James would need to pay HMRC the £2,400 VAT in his April–June VAT return, even though he hadn’t received the money yet.
- Under the Cash Accounting Scheme, he only pays the £2,400 VAT once the client pays in July.
👉 This scheme is most useful if you offer credit terms or often have to wait for payment.
VAT Annual Accounting Scheme
The Annual Accounting Scheme is designed to reduce the amount of VAT paperwork for small businesses. Instead of filing four VAT returns each year, you:
- Submit just one VAT return annually.
- Make advance payments towards your VAT bill throughout the year, either quarterly or monthly.
- Balance the total when you file your annual return.
👉 You can join the Annual Accounting Scheme if your estimated VAT-taxable turnover is £1.35 million or less. You must leave the scheme if your annual turnover exceeds £1.6 million.
Pros
- Only one VAT return per year – less paperwork.
- Helps spread VAT payments across the year.
- Easier to plan cash flow with fixed instalments.
Cons
- If you reclaim VAT regularly, you may wait longer for repayments.
- Not ideal if your turnover fluctuates a lot.
Example
Maria owns a small shop with an annual VAT liability of around £12,000.
- Instead of filing four quarterly VAT returns, Maria joins the Annual Accounting Scheme.
- She chooses to make quarterly instalments of £3,000 each towards her VAT bill.
- At the end of the year, her actual VAT return shows she owes £12,500. She pays the £500 balance when submitting the return.
👉 This scheme is best for businesses with steady turnover that prefer fewer VAT returns and predictable payments.
VAT Retail Scheme
The Retail Scheme is designed for businesses that sell a large volume of low-value items to the public and can’t easily issue a VAT invoice for every single sale. Instead of recording the VAT on each transaction, you:
- Record your total daily or weekly sales.
- Use HMRC’s approved methods to work out how much VAT to pay.
- You must provide a VAT receipt if requested by the customer.
There are three main types of retail schemes:
- Point of Sale Scheme – you identify the VAT rate of each item sold at the time of sale (ideally, you can easily split sales by VAT rate).
- Apportionment Scheme – you calculate VAT by splitting your sales between standard-rated, reduced-rated, and zero-rated goods. It is based on the purchased goods for resale
- Direct Calculation Scheme – you use a calculation using the expected selling prices of minority or majority goods.
👉 You can use the Retail Scheme if your estimated VAT-taxable turnover is £130 million or less. Above this, you’ll need to agree on a bespoke scheme with HMRC.
Pros
- Saves time if you make lots of small or mixed VAT-rated sales.
- Less paperwork – you don’t need a VAT invoice for every sale.
Cons
- More complex if you sell goods at different VAT rates and don’t use the Point of Sale method.
- You still need reliable till records to back up your calculations.
Example of the Retail Scheme
Tom runs a convenience store that offers a mix of goods: some standard-rated items (such as snacks and drinks), and some zero-rated items (like bread and milk). Issuing a VAT invoice for every small sale would be impossible.
- At the end of the week, Tom totals his sales at £10,000.
- Using the Apportionment Scheme, he works out that £6,000 of sales are standard-rated and £4,000 are zero-rated.
- He calculates the VAT due only on the standard-rated portion, paying HMRC £1,000 VAT.
👉 This scheme is best for shops, cafes, and other retailers with a high volume of small transactions.
VAT Margin Scheme
The Margin Scheme is a special method for calculating VAT when you sell second-hand goods, antiques, works of art, or collectables. Instead of charging VAT on the full selling price, you only pay VAT on the profit margin – the difference between what you paid for the item and what you sold it for.
Summary VAT Schemes
VAT accounting can be complicated, but selecting the best VAT scheme and maintaining accurate records makes it much easier to manage. Whether you stick with the Standard Scheme or benefit from options like the Flat Rate, Cash Accounting, Annual Accounting, Retail, or Margin Schemes, the best choice depends on your type of business, turnover, and cash flow needs.
If you are unsure which scheme is best for your business, it is always advisable to seek advice from an accountant.
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