VAT Accounting Schemes

Saving money with VAT

Did you know there are four VAT Accounting Schemes? Choose the right method and you’ll save money, save time on your paperwork and improve your cash-flow in one easy move.

The Value Added Tax is normally calculated quarterly by working out the VAT on the sales less VAT on the purchases. The payment is due by the end of the following month for the quarter.

For smaller businesses, there are also three different schemes in which a company can pay for their VAT, the scheme that you choose will depend on the turnover and how long customers take to pay you.

Flat Rate Scheme

Only businesses with a turnover under £150,000 can use this scheme.

The VAT is worked out by applying a flat rate percentage to the total turnover (including VAT). The percentage depends on the type of business but is between 2% and 13.5%.

The advantage of this scheme is that there is less time involved: the VAT is calculated on the total turnover. It is simpler than doing VAT the normal way as you do not need to record the VAT on small purchases.

If your company is just registering for VAT a further 1% can be discounted for the first year only.


One disadvantage to this scheme is if you have high expenses, as these can’t be reclaimed. There are some exceptions for capital assets.

An example of the Flat rate scheme, is a gift business sells £500.00 the Value Added Tax would be £100.00.

The flat rate scheme for other retail is 7.5%. The rate of 7.5% on £600.00 is £45.00. Although there is a difference of £55, you would need to look at the other expenses of the business to see if this is the best scheme for the business.

Check out the flat scheme and the different rates available, it also includes a calculator to see how much you could pay.

Cash Accounting Scheme

Only businesses with a turnover under £1,350,000 can use this scheme.

With this scheme, the company only pays their VAT when they have been paid by their customers: If you are paid late by a customer you do not need to pay the VAT until the debt has been paid.

This scheme has an advantage to businesses who offer long term credit facilities, or have problems collecting debts.

If for any reason the account is not paid then you do not have to pay the VAT at all.

Annual Accounting Scheme

Only businesses with a turnover under £1,350,000 can use this scheme.

The company pay either by monthly or quarterly instalments and complete a single return at the year-end with any balance due.

The advantages of this scheme are that you know how much VAT you are going to pay either each month or quarter: you have no big bills and less time will be spent on filling in VAT returns.

Full details of the different schemes are on the Government website.

Summary VAT Accounting Scheme

Choosing the best VAT accounting scheme for your business can be complicated. One option is to look at figures for a fixed period of time and see if one is better than the others financially.

Look at a period of 6 months if you can. It is worth also taking into account the time for preparing the accounts and the accounting software that the business uses.

If you are not sure it is best to speak to an accountant to get advice.

Once a scheme is chosen it is difficult to change from one to another, so you want to make sure you are on the best scheme for the business.

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