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VAT Accounting Schemes

VAT Accounting Schemes

This guide looks at how the 3 main accounting schemes work and how they can help businesses.

Special VAT accounting schemes for small businesses have been available for a number of years, but they are still under used. The 3 main schemes are:

  • Cash Accounting
  • Annual Accounting
  • 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. Input tax not being deductible until purchase invoices are paid is a disadvantage, but as the norm is making a profit, the scheme is usually beneficial. 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 it’s 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.

Other advantages are :

  • Simplified accounting, in that well analysed cash and bank records are usually enough
  • No need for VAT relief on bad debts because it is not paid to HMRC up front.
There are other conditions for using the scheme, such as having to use it for the whole of a business and normally staying in it for at least 2 years, but these are not usually a burden. Businesses can leave the scheme at any time if they are not benefitting from it or struggling with the accounting requirements. Records must be kept in such a way that invoices issued and received can be easily cross-referenced to payment dates but that is usually straightforward.

It is not compulsory to leave the scheme and revert to accruals-based accounting until annual taxable turnover reaches £1,600,000. This built in 25% tolerance gives flexibility for growing businesses. On leaving the scheme, all outstanding tax must be paid within 6 months of the leaving date.

To see the details on Annual Accounting and the Flat Rate Scheme, please download the attached PDF.

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