Special VAT Schemes
As in Ireland, there are a number of VAT simplification schemes for businesses with turnovers below a certain amount.
Annual Accounting
Smaller businesses may be able to avail of annual accounting. Under the annual accounting scheme, VAT can be paid by monthly or quarterly instalments during the year based on a estimate of total VAT liability at the end of the year. There is a single annual return and a balancing adjustment. This involves a single VAT return.
VAT payments must still be made regularly. Payments on account are required at the end of months four to twelve. Each must represent at least 10% of the VAT liability for the previous year. A new business must base its payments on an estimate of the VAT liability for the year.
The annual return is to be made within two months of the end of the annual return period.A balancing payment or repayment is made when the return is filed.
The annual accounting scheme is available provided taxable turnover does not exceed £1,350,000.
An application must be made to HMRC to permit annual accounting. VAT returns must be up to date.
A person admitted to the scheme may remain in it until his turnover exceeds £1.6 million. He will then exit the scheme and revert to the normal method of payment accounting for that. An adjustment may be required to reflect the change in the basis of accounting
Cash Received Basis
The normal position with VAT is that it is due upon invoice rather than upon receipt of the cash. Therefore VAT will normally be payable once the goods or services are supplied even though payment is delayed. It may be possible to reclaim VAT if a debt becomes bad.
Under the cash accounting scheme, VAT is accounted for on the basis of cash receipts on payments rather than on the basis of invoice dates and accruals. The tax point becomes the date of receipt or payment. The scheme is available under certain conditions. It is necessary to apply and procure Revenue approval to use the cash accounting scheme.
The scheme is only available to smaller businesses. Trader’s VAT returns must be up to date and he must have no convictions for VAT offences.
The trader’s taxable turnover must not exceed £1,350,000 per annum. A trader must leave the scheme once the taxable turnover exceeds £1,600,000 per annum. The cash accounting scheme cannot be used for goods that are invoiced more than six months in advance of the payment date or where an invoice has been issued prior to the sale actually taking place.
Flat Rate Scheme
The flat rate VAT accounting scheme is designed to help small businesses simplify calculation of VAT. They pay VAT as a percentage of their turnover
Where the scheme applies, a business calculates VAT liabilities by simply applying a flat rate percentage to the entire turnover. This removes the need to calculate and record output VAT and input VAT.
The flat rate percentage is applied to the gross i.e. VAT inclusive total turnover figure with no input VAT being recovered. The percentage varies in accordance with the type of trade and the business involved in. VAT at the rate of 15 is still charged and the standard rate applies and a VAT invoice must still be issued.
In order to qualify for the scheme the expected turnover, excluding VAT for the next 12 months must not exceed £150,000. The expected total income for the next 12 months must not exceed a certain percentage above this.
Under the scheme, percentages are set according to the trade sector. It is not possible to reclaim VAT as this is taken into consideration as part of the percentage calculation. The benefit of the scheme is that it reduces the time spent on accounting for VAT because it is not necessary to record VAT charge on each individual purchase and sale. The scheme is available if turnover (excluding VAT) is less than £150,000 or less.
Small businesses are incentivised by HMRC to use the scheme; in effect a 1% reduction in VAT rate is available in the first year for new businesses who apply the scheme and are compliant
Businesses must leave the scheme as their annual turnover (including VAT )reaches £230,000.
Retail Schemes
Retailers that sell directly to the pubic with different applicable rates may find it difficult to assess VAT liability. There are several retail schemes available to assist. The schemes provide an alternative to standard VAT accounting .VAT invoices are not required for retail sales unless they are specifically requested.
Where retailers sell goods only subject to VAT at the standard rate (20%) the VAT fraction is 1.6. This is the standard vat rate (20%) over the tax inclusive price (120%) 20/120.