Tag Archives: VAT-flat-rate-scheme

VAT Schemes Guide – Alternative ways of accounting for tax

By   5 November 2024
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VAT Basics
There are a number of VAT Schemes which are designed to simplify accounting for the tax. They may save a business money, reduce complexity, avoid the need for certain documentation and reduce the time needed to deal with VAT. Some schemes may be used in combination with others, although I recommend that checks are made first.

It is important to compare the use of each scheme to standard VAT accounting to establish whether a business will benefit. Some schemes are compulsory and there are particular pitfalls for businesses using certain schemes.

I thought that it would be useful to consider the schemes all in one place and look at their features and pros and cons.

These schemes reviewed here are:

  • Cash Accounting Scheme
  • Annual Accounting Scheme
  • Flat Rate Scheme
  • Margin schemes for second-hand goods
  • Global Accounting
  • VAT schemes for retailers

Cash Accounting Scheme

Normally, VAT returns are based on the tax point (usually the VAT invoice date) for sales and purchases. This may mean a business having to pay HMRC the VAT on sales which customers have not yet paid for.

The VAT cash accounting scheme (CAS) instead bases reporting on payment dates, both for purchases and sales. A business will need to ensure its records include payment dates.

A business is only eligible for CAS if its estimated taxable turnover is no more than £1.35m, and can then remain in the scheme as long as it remains below £1.6m.

Advantages

  • usually beneficial for cash flow especially if its customers are slow to pay
  • output tax is not payable at all if a business has a bad debt (other bad debt relief here)

Disadvantages

  • it is generally not beneficial for a repayment business (one which reclaims more VAT than it pays, eg; an exporter or supplier of zero rated goods or services)
  • it is not usually beneficial if a business purchases significant amounts of goods or services on credit

Annual Accounting Scheme

The Annual Accounting Scheme allows a business to pay VAT on account, in either nine monthly or three quarterly payments. These instalments are based on VAT paid in the previous year. It is then required to complete a single, annual VAT return which is used to calculate any balance owed by the business or due from HMRC.

A business is eligible for the scheme if its estimated taxable turnover is no more than £1.35m and is permitted to remain in the scheme as long as it remains below £1.6m.

Advantages

  • reduces paperwork as only the need to complete one return instead of four (although it does not remove the requirement to keep all the normal VAT records and accounts)
  • improves management of cash flow

Disadvantages

  • not suitable for repayment businesses as they would only receive one repayment at the end of the year
  • if turnover decreases, the interim payments may be higher than under standard accounting

Flat Rate Scheme

The Flat Rate Scheme (FRS) is designed to assist smaller businesses reduce the amount of time and complexity required for VAT accounting. The FRS removes the need to calculate the VAT on every transaction. Instead, a business pays a flat rate percentage of its VAT inclusive turnover. The percentage paid is less than the standard VAT rate because it recognises the fact that no input tax can be claimed on purchases. The flat rate percentage used is dependent on a business’ trade sector.

A business is eligible for this scheme if its estimated taxable turnover in the next year will not exceed £150,000. Once using the scheme, a business is permitted to continue using it until its income exceeds £230,000.

If eligible, a business may combine the FRS with the Annual Accounting Scheme, additionally, there is an option to effectively use a cash basis so there is no need to use CAS. Unfortunately, changes to the scheme rules regarding ” limited cost traders” mean that the scheme has become less attractive.

Advantages

  • depending on trade sector and circumstances, may result in a real VAT saving
  • simplified record keeping; no requirement to separate gross, VAT and net in accounts
  • fewer rules; no issues with input tax a business can and cannot recover on purchases
  • certainty of knowing how much of income is payable to HMRC

Disadvantages

  • no reclaim of input tax incurred on purchases
  • limited cost traders impact
  • if a business buys a significant amount from VAT registered businesses, it is likely to result in more VAT due
  • likely to be unattractive for businesses making zero-rated or exempt sales because output tax would also apply to this hitherto VAT free income
  • low turnover limit

Margin Scheme for Second Hand Goods

A business normally accounts for output tax on the full value of its taxable supplies and reclaims input tax on its purchases. However, if a business deals in second-hand goods, works of art, antiques or collectibles it may use a Margin Scheme. This scheme enables a business to account for VAT only on the difference between the purchase and selling price of an item; the margin. It is not possible to reclaim input tax on the purchase of an item and there will be no output tax if no profit is achieved (however, if an item is sold for less than the purchase price, a business cannot offset losses against the profits of other items to reduce the overall VAT liability).

There is a special margin schemes for auctioneers and a variation of the Margin Scheme (Global Accounting) is considered below.

Advantages

  • usually beneficial if buying from (non-VAT registered) members of the public
  • purchaser will not see a VAT charge
  • although no input tax claimable on purchases of scheme items, VAT may be claimed in the usual way on overheads and other fees etc

Disadvantages

  • record keeping requirements are demanding and closely checked, eg; stock records and invoices which are required for both purchases and sales
  • cannot be used for items purchased on a VAT invoice
  • can be complex and create a cost if goods exported
  • although no VAT due on sales if a loss is made, there is no set-off of the loss

Global Accounting

The problem with the Second Hand Goods Scheme is that full details of each individual item purchased and sold has to be recorded. Global Accounting is an optional, simplified variation of the Second Hand Margin Scheme. It differs from the standard Margin Scheme in that rather than accounting for the margin achieved on the sale of each individual item, output tax is calculated on the margin achieved between the total purchases and total sales in a particular accounting period.

Advantages

  • simplified version of the Margin Scheme
  • record keeping requirements reduced
  • losses made on sales reduce VAT payable
  • beneficial for businesses which buy and sell bulk volume, low value eligible goods

Disadvantages

  • cannot be used for; aircraft, boats, caravans, horses or motor vehicles
  • similar to Margin Scheme disadvantages apart from loss set off

VAT Schemes for Retailers

It is usually difficult for retailers to issue an invoice for each sale made, so various retail schemes have been designed to simplify VAT. The appropriate scheme for a business depends on whether its retail turnover (excluding VAT) is; below £1m, between £1m and £130m and higher.

Smaller businesses may be able to use a retail scheme with CAS and Annual Accounting but it cannot combine a Retail Scheme with the FRS. However, retailers may choose to use the FRS instead of a Retail Scheme.

Using standard VAT accounting, a VAT registered business must record the VAT on each sale. However, via a Retail Scheme, it calculates the value of its total VAT taxable sales for a period, eg; a day, and the proportions of that total that are taxable at different rates of VAT; standard, reduced and zero.

According to the scheme a business uses it then applies the appropriate VAT fraction to that sales figure to calculate the output tax due. A business may only use the Retail Scheme for retail sales and must use the standard accounting procedures for other supplies. A business must still issue a VAT invoice to any customer who requests one. It is a requirement of any scheme choice that HMRC must consider it fair and reasonable.

A business can join a retail scheme at the beginning of any VAT period and HMRC does not need to be notified.

Examples of Retail Schemes

  • Apportionment
  • Direct calculation
  • The point of sale scheme

The required calculations vary for each scheme.

NB: There are special arrangements for caterers, retail pharmacists and florists.

Advantages

  • no requirement to issue an invoice for each sale
  • most schemes are relatively simple to administer once set up. Technology assists in a helpful way with EPOS systems
  • simplifies record keeping

Disadvantages

  • it is usual for each line sold to need to be coded correctly for VAT liability
  • smaller businesses without state of the art technology may be at a disadvantage
  • time and resources required to set up and maintain systems
  • in some cases the calculation depends on staff “pressing the right button”
  • often complex calculations and record keeping
  • very precise and complicated rules
  • lack of understanding by a number of inspectors
  • complexity increases the risk of misdeclaration

Overall

As may be seen, there are a lot of choices for a business to consider, especially a start-up.  Choosing a scheme which is inappropriate may result in VAT overpayment and a lot of unneeded record keeping and administration.  There are real savings to be made by using a beneficial scheme, both in terms of VAT payable and staff time. There are also some schemes which are compulsory, like the Tour Operators’ Margin Scheme (TOMS).

We are happy to review a business’ circumstances and calculate what schemes would produce the best outcome.

Please contact us if you require further information.

What VAT CAN’T you claim?

By   12 August 2024
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VAT Basics
The majority of input tax incurred by most VAT registered businesses may be recovered. However, there is some input tax that may not be. I thought it would be helpful if I pulled together all of these categories in one place:

Blocked VAT claims – an overview

  • No supporting evidence

In most cases this evidence will be an invoice (or as the rules state “a proper tax invoice”) although it may be import, self-billing or other documentation in specific circumstances. A claim is invalid without the correct paperwork. HMRC mayaccept alternative evidence, however, they are not duty bound to do so (and rarely do unless the amount is minimal). So ensure that you always obtain and retain the correct documentation.

  • Incorrect supporting evidence

Usually this is an invalid invoice, or using a delivery note/statement/pro forma in place of a proper tax invoice. To support a claim an invoice must show all the information set out in the legislation. HMRC are within their rights to disallow a claim if any of the details are missing.

  •  Input tax relating to exempt supplies

Broadly speaking, if a business incurs VAT in respect of exempt supplies it cannot recover it. If a business makes only exempt supplies it cannot even register for VAT. There is a certain easement called de minimis which provide for recovery if the input tax is below certain prescribed limits. Input tax which relates to both exempt and taxable activities must be apportioned. More details of partial exemption may be found here.

  •  Input tax relating to non-business activities

If a charity or NFP entity incurs input tax in connection with non-business activities this cannot be recovered and there is no de minimis relief. Input tax which relates to both business and non-business activities must be apportioned. Business versus non-business apportionment must be carried out first and then any partial exemption calculation for the business element if appropriate. More details here

  •  Time barred

If input tax is not reclaimed within four years of it being incurred, the capping provisions apply and any claim will be rejected by HMRC.

  •  VAT incurred on business entertainment

This is always irrecoverable unless the client or customer being entertained belongs overseas. The input tax incurred on staff entertainment costs is however recoverable. A flowchart for recoverability in this area here.

  •  Car purchase

In most cases the VAT incurred on the purchase of a car is blocked. The only exceptions are for when the car; is part of the stock in trade of a motor manufacturer or dealer, or is used primarily for the purposes of taxi hire; self-drive hire or driving instruction; or is used exclusively for a business purpose and is not made available for private use. This last category is notoriously difficult to prove to HMRC and the evidence to support this must be very good.

  •  Car leasing

If a business leases a car for business purposes it will normally be unable to recover 50% of the VAT charged.  The 50% block is to cover the private use of the car.

  • Fuel costs

The element of fuel costs used for personal use is blocked. There are three ways to treat input tax on fuel:

    • claim 100% of the VAT charged. This is possible if fuel is bought for business motoring only or for both business and private motoring and the appropriate road fuel scale charge is applied on the value of supplies of fuel for private use
    • use detailed mileage records to separate business mileage from private mileage and only claim for the business element
    • claim no input tax
  •  A business using certain schemes

For instance, a business using the Flat Rate Scheme cannot recover input tax except for certain large capital purchases, also there are certain blocks for recovery on for Tour Operators’ Margin Scheme (TOMS) users

  •  VAT charged in error

Even if a business obtains an invoice purporting to show a VAT amount, this cannot be recovered if the VAT was charged in error; either completely inappropriately or at the wrong rate. A business’ recourse is with the supplier and not HMRC.

  •  Goods and services not used for a business

Even if a business has an invoice addressed to it and the services or goods are paid for by the business, the input tax on the purchase is blocked if the supply is not for that business’ use. This may be because the purchase is for personal use, or by another business or for purposes not related to the claimant business.

This is not input tax and therefore is not claimable. However, there are exceptions for goods on hand at registration and which were purchased within four years of registration, and services received within six months of registration if certain conditions are met.

  •  VAT incurred by property developers

Input tax incurred on certain articles that are installed in buildings which are sold or leased at the zero rate is blocked.

  •  Second hand goods

Goods sold to a business under one of the VAT second-hand schemes will not show a separate VAT charge and no input tax is recoverable on these goods.

  •  Transfer of a going concern (TOGC)

Assets of a business transferred to you as a going concern are not deemed to be a supply for VAT purposes and consequently, there is no VAT chargeable and therefore no input tax to recover.

  •  Disbursements

A business cannot reclaim VAT when it pays for goods or services to be supplied directly to its client. However, in this situation the VAT may be claimable by the client if they are VAT registered. For more on disbursements see here.

  •  VAT incurred overseas

A business cannot reclaim VAT charged on goods or services that it has bought from suppliers in other EU States. Only UK VAT may be claimed on a UK VAT return. There is however, a mechanism available to claim this VAT back from the relevant authorities in those States. Details here. However, in most cases, supplies received from overseas suppliers are VAT free, so it is usually worth checking whether any VAT has been charged correctly.

  • Business assets of £50,000 and more

There are special rules for reclaiming input tax using the Capital Goods Scheme, which means a business must spread the initial VAT claimed over a number of years.

VAT tertiary legislation – HMRC’s new guidance

By   13 May 2024
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HMRC has published new a guide to all information about VAT that has ‘force of law’.

The manual contains all the tertiary legislation for VAT which HMRC has published – all in one place. Primary and secondary legislation is published on Legislation.gov.uk.

What is tertiary legislation?

Within primary and secondary legislation, government departments are sometimes granted the power to publish additional legally binding conditions or directions on a given topic. This information is known as ‘tertiary legislation’.

Tertiary legislation carries ‘force of law’. This means it has the same legal status as primary and secondary legislation. HMRC has an obligation to publish this information in accordance with the law.

The guidance covers:

(with links to the relevant legislation)

 

 

VAT treatment of deposits and advance payments

By   16 May 2022
2

One query that constantly reappears is that of the VAT treatment of deposits.

This may be because there are different types of deposits with different VAT rules for each. I thought that it would be helpful for all the rules to be set out in one place, and some comments on how certain transactions are structured, so…

Broadly, we are looking at the tax point rules. The tax point is the time at which output tax is due and input tax recoverable. More on tax points here 

A business may have various commercial arrangements for payments such as:

  • receiving advance payments
  • being paid in instalments
  • credit sales
  • periodic payments for continuous supplies
  • security deposits for goods hired

I consider these below, as well as some specific arrangements:

Advance payments and deposits

An advance payment, or deposit, is a proportion of the total selling price that a customer pays a business before it supplies them with goods or services.

The tax point if an advance payment is made is whichever of the following happens first:

  • the date a VAT invoice for the advance payment is issued
  • the date you the advance payment is received

The VAT due on the value of the advance payment (only, not the full value of the overall supply) is included on the VAT return for the period when the tax point occurs.

If the customer pays the remaining balance before the goods are delivered or the services are performed, a further tax point is created when whichever of the following happens first:

  • the date a VAT invoice for the balance is issued
  • payment of the balance is received

So VAT is due on the balance on the return for when the further tax point occurs.

Returnable deposits

A business may ask its customers to pay a deposit when they hire goods. No VAT is due if the deposit is either:

  • refunded in full to the customer when they return the goods safely
  • kept by you to compensate you for loss or damage

Forfeit deposits

If a customer is asked for a deposit against goods or services but they then don’t buy them or use the services, it may be decided to retain the deposit. Usually the arrangement is that the customer is told/agrees in advance and it is part of the conditions for the sale. This arrangement is known as forfeit deposit. It often occurs when, for example, an hotel business makes a charge for reserving a room.

VAT should be declared on receipt of the deposit or when a VAT invoice is issued, whichever happens first.

HMRC announced via its Policy Paper Customs Brief 13 (2018) that the VAT treatment of forfeit, or “no-show” deposits changed from 1 March 2019.

The changes affect businesses that receive payments for services and part payments for goods and the customer does not:

  • use the service
  • collect the goods

Typically, this could be a hotel which reserves a room for a deposit which is retained if the customer is a no-show.

Previous treatment

Prior to 1 March 2019, charges for unfulfilled supplies and the retention of customer deposits are treated as outside the scope of VAT (and consequently VAT free). This is on the basis that either no supply had been made or, in the alternative, the retention of the deposit represents compensation for a loss, or the costs necessarily incurred.

Practically, this means that output tax is payable on the initial deposit, but this is adjusted if subsequently there is a no-show or goods are not collected.

Current treatment

From 1 March 2019, HMRC’s policy is that output tax is due on all retained payments for unused services and uncollected goods. Where businesses become aware that a customer has decided not to take up goods or services after paying, the transaction will remain subject to VAT. No adjustments or refunds of VAT will be allowed for those retained payments.

This means that when a non-repayable deposit is taken, VAT will always be due on the payment, regardless of subsequent events. However, if a deposit is returned, there will be no VAT due on it.

The rationale for the new treatment, according to HMRC is that; “because when a customer makes or commits to make a payment, it is for a supply. It cannot be reclassified as a payment to compensate the supplier for a loss once it is known the customer will not use the goods or services”

Continuous supplies

If a business supplies services on a continuous basis and it receives regular or occasional payments, a tax point is created every time a VAT invoice is issued or a payment received, whichever happens first. An article on tax planning for continuous supplies here

If payments are due regularly a business may issue a VAT invoice at the beginning of any period of up to a year for all the payments due in that period (as long as there’s more than one payment due). If it is decided to issue an invoice at the start of a period, no VAT is declared on any payment until either the date the payment is due or the date it is received, whichever happens first.

Credit and conditional sales

This is where the rules can get rather more complex.

  • A credit sale means the sale of goods which immediately become the property of the customer but where the price is paid in instalments.
  • A conditional sale is where goods are supplied to a customer but the goods remain the seller’s property until they are paid for in full.

The tax point for a credit sale or a conditional sale is created at the time you supply the goods or services to your customer. This is the basic tax point and is when you should account for the VAT on the full value of the goods.

This basic tax point may be over-ridden and an actual tax point created if a business:

  • issues a VAT invoice or receives payment before supplying the goods or services
  • issues a VAT invoice up to 14 days after the basic tax point

Credit sales where finance is provided to the customer

If goods are offered on credit to a customer and a finance company is not involved, the supplier is financing the credit itself. If the credit charge is shown separately on an invoice issued to the customer, it will be exempt from VAT. Other fees relating to the credit charge such as; administration, documentation or acceptance fees will also be exempt. VAT is declared on the full value of the goods that have been supplied on the VAT Return for that period.

If goods or services are supplied on interest free credit by arranging with a customer for them to pay over a set period without charging them interest then VAT is declared on the full selling price when you make the supplies.

Credit sales involving a finance company

When a business makes credit sales involving a finance company, the finance company either:

  • becomes the owner of the goods, eg; when a purchase is financed by a hire-purchase agreement
  • does not become the owner of the goods, eg; when a purchase is financed by a loan agreement

Hire purchase agreements

If the finance company becomes the owner of goods, the business is supplying the goods to the finance company and not the customer. There is no charge for providing the credit, so the seller accounts for VAT on the value of the goods at the time they are supplied to the finance company. Any commission received from the finance company for introducing them to the customer is usually subject to VAT.

Loan agreements

If the finance company does not become owner of the goods, the supplier is selling the goods directly to its customer. The business is not supplying the goods to the finance company, even though the finance company may pay the seller direct.  VAT is due on the selling price to the customer, even if the seller receives a lower amount from the finance company. The contract between the customer and the finance company for credit is a completely separate transaction to the sale of the goods.

Specific areas 

The following are areas where the rules on the treatment may differ

Cash Accounting Scheme

If a business uses the cash accounting scheme here it accounts for output tax when it receives payment from its customers unless it is a returnable deposit

Property

Care should be taken with deposits in property transactions.  This is especially important if property is purchased at auction.

These comments only apply to the purchase of property on which VAT is due (commercial property less than three years old or subject to the option to tax).  If a deposit is paid into a stakeholder, solicitor’s or escrow account (usually on exchange) and the vendor has no access to this money before completion no tax point is created. Otherwise, any advance payment is treated as above and creates a tax point on which output tax is due to the extent of the deposit amount. Vendors at auction can fall foul of these rules. If no other tax point has been created, output tax is due on completion.

Tour Operators’ Margin Scheme (TOMS)

TOMS has distinct rules on deposits.  Under normal VAT rules, the tax point is usually when an invoice is issued or payment received (as above).  Under TOMS, the normal time of supply is the departure date of the holiday or the first occupation of accommodation. However, in some cases this is overridden.  If the tour operator receives more than one payment, it may have more than one tax point. Each time a payment is received exceeding 20% of the selling price, a tax point for that amount is created. A tax point is also created each time the payments received to date (and not already accounted for) exceed 20% when added together. There are options available for deposits received when operating TOMS, so specific advice should be sought.

VAT Registration

In calculating turnover for registration, deposits must be included which create a tax point in the “historic” test.  Care should also be taken that a large deposit does not trigger immediate VAT registration by virtue of the “future” test. This is; if it is foreseeable at any time that receipts in the next 30 days on their own would exceed the turnover limit, currently £85,000, then the registration date would be the beginning of that 30-day period.

Flat Rate Scheme

A business applies the appropriate flat rate percentage to the value of the deposit received (unless it is a returnable deposit).  In most cases the issue of an invoice may be ignored if the option to use a version of cash accounting in the Flat Rate Scheme is taken. More on the FRS here and here

Please contact us if you have any queries on this article or would like your treatment of deposits reviewed to:

  • Ensure treatment is correct to avoid penalties, and/or;
  • Establish whether planning is available to properly defer payments of output tax under the tax point rules.

VAT stats 2020-21

By   20 December 2021
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HMRC has published UK VAT statistics for 2020 to 2021.

Headlines

The total VAT receipts in the tax year ending March 2021 decreased by 22% (£24.1 billion) from the previous year. There was a downward impact on receipts from the VAT deferral measure which took effect from 20 March 2020.

The Wholesale and Retail sector continued to be the largest contributor to net Home VAT liabilities.

Import VAT receipts was also lower: £4.2 billion (13%) for the year compared to the year ending March 2020. This was mainly due to postponed VAT accounting.

68% of total net home VAT declared was paid by traders with an annual turnover greater than £10 million.

VAT population – income

Incorporated companies accounted for the largest share of the VAT population and annual turnover. Companies accounted for 73% of taxpayers, and 92% of annual taxable turnover in the year ending March 2021. Sole proprietors were the second largest group in terms of VAT population; this group accounted for 16% of VAT traders.

Businesses with an annual turnover greater than £10 million declared £67 billion in net VAT, 68% of the total for the tax year. This group only accounted for 1% of businesses.

52% of businesses declared annual turnover below the VAT registration threshold of £85,000.

VAT population – trade sectors

The wholesale and retail sector was the largest in terms of contribution to VAT liabilities. Net VAT liabilities were £29 billion (30%) of the total for the tax year ending March 2021. The financial and insurance sector has replaced the arts, entertainment and recreation sector and accommodation and food services sector in the top ten trade sectors from the previous year.

The construction sector increased by £650 million (12%), the largest year-on-year change. The only other sectors to see increases were wholesale and retail sectors which increased by £30 million (2%) and professional, scientific, and technical activities which increased by £19 million (2%). Of the top VAT contributing sectors, the financial and insurance sector saw the largest decrease of £560 million (25%).

VAT registrations

New registrations increased from the tax year ending March 2013 to the tax year ending March 2017 where it decreased by 33,666 (8%). Since the tax year ending March 2018, there has been an upward trend in new registrations – 300,000 in the year to 2021.

Deregistrations were below 200,000 a year from the tax year ending March 2014 to the tax year ending March 2016, but increased above that level in the tax year ending March 2017, increasing further in the tax year ending March 2018. This increase in deregistrations was likely to be linked to policy changes in relation to the Flat Rate Scheme.

The freeze in the VAT registration and deregistration thresholds has increased the number of registrations and decreased the number of deregistrations progressively from the year ending March 2019.

VAT Schemes Guide – Alternative ways of accounting for tax

By   17 May 2021
0

There are a number of VAT Schemes which are designed to simplify accounting for the tax.  They may save a business money, reduce complexity, avoid the need for certain documentation and reduce the time needed to deal with VAT.  Some schemes may be used in combination with others, although I recommend that checks should be made first.

It is important to compare the use of each scheme to standard VAT accounting to establish whether a business will benefit.  Some schemes are compulsory and there are particular pitfalls for certain businesses using certain schemes.

I thought that it would be useful to consider the schemes all in one place and look at their features and pros and cons.

These schemes reviewed here are:

  • Cash Accounting Scheme
  • Annual Accounting Scheme
  • Flat Rate Scheme
  • Margin schemes for second-hand goods
  • Global Accounting
  • VAT schemes for retailers

Cash Accounting Scheme

Normally, VAT returns are based on the tax point (usually the VAT invoice date) for sales and purchases. This may mean a business having to pay HMRC the VAT due on sales that its customers have not yet paid for.

The VAT cash accounting scheme instead bases reporting on payment dates, both for purchases and sales. A business will need to ensure its records include payment dates.

A business is only eligible for the Cash Accounting Scheme if its estimated taxable turnover is no more than £1.35m, and can then remain in the scheme as long as it remains below £1.6m.

Advantages

  • Usually beneficial for cash flow especially if its customers are slow paying
  • Output tax is not payable at all if a business has a bad debt

Disadvantages

  • Is generally not beneficial for a repayment business (one which reclaims more VAT than it pays, eg; an exporter or supplier of zero rated goods or services)
  • Not usually beneficial if a business purchases significant amounts of goods or services on credit

Annual Accounting Scheme

The Annual Accounting Scheme allows a business to pay VAT on account, in either nine monthly or three quarterly payments. These instalments are based on VAT paid in the previous year. It is then required to complete a single, annual VAT return which is used to calculate any balance owed by the business or due from HMRC.

A business is eligible for the scheme if its estimated taxable turnover is no more than £1.35m and is permitted to remain in the scheme as long as it remains below £1.6m.

Advantages

  • Reduces paperwork as only the need to complete one return instead of four (Although it does not remove the requirement to keep all the normal VAT records and accounts)
  • Improves management of cash flow

Disadvantages

  • Not suitable for repayment businesses as they would only receive one repayment at the end of the year
  • If turnover decreases, the interim payments may be higher than under standard accounting

Flat Rate Scheme

The Flat Rate Scheme is designed to assist smaller businesses reduce the amount of time and complexity required for VAT accounting. The Flat Rate Scheme removes the need to calculate the VAT on every transaction. Instead, a business pays a flat rate percentage of its VAT inclusive turnover. The percentage paid is less than the standard VAT rate because it recognises the fact that no input tax can be claimed on purchases. The flat rate percentage used is dependent on a business’ trade sector.

A business is eligible for this scheme if its estimated taxable turnover in the next year will not exceed £150,000. Once using the scheme, a business is permitted to continue using it until its income exceeds £230,000.

If eligible, a business may combine the Flat Rate Scheme with the Annual Accounting Schemes, additionally, there is an option to effectively use a cash basis so there is no need to use the Cash Accounting Scheme. New rules regarding ” limited cost traders” mean that the scheme has become less attractive.

Advantages

  • Depending on trade sector and circumstances may result in a real VAT saving
  • Simplified record keeping; no requirement to separate out gross, VAT and net in accounts
  • Fewer rules; no issues with input tax a business can and cannot recover on purchases
  • Certainty of knowing how much of income is payable to HMRC

Disadvantages

  • No reclaim of input tax incurred on purchases
  • Limited cost traders impact
  • If a business buys a significant amount from VAT registered businesses, it is likely to result in more VAT due
  • Likely to be unattractive for businesses making zero-rated or exempt sales because output tax would also apply to this hitherto VAT free income
  • Low turnover limit

Margin Scheme for Second Hand Goods

A business normally accounts for output tax on the full value of its taxable supplies and reclaims input tax on its purchases. However, if a business deals in second-hand goods, works of art, antiques or collectibles it may use a Margin Scheme. This scheme enables a business to account for VAT only on the difference between the purchase and selling price of an item; the margin. It is not possible to reclaim input tax on the purchase of an item and there will be no output tax if no profit is achieved. There is a special margin schemes for auctioneers. A variation of the Margin Scheme is considered below.

Advantages

  • Usually beneficial if buying from (non-VAT registered) members of the public
  • Purchaser will not see a VAT charge
  • Although no input tax claimable on purchases of scheme items, VAT may be claimed in the usual way on overheads and other fees etc

Disadvantages

  • Record keeping requirements are demanding and closely checked, eg; stock records and invoices which are required for both purchases and sales
  • Cannot be used for items purchased on a VAT invoice
  • Can be complex and create a cost if goods exported
  • Although no VAT due on sales if a loss is made, there is no set-off of the loss

Global Accounting

The problem with the Second Hand Goods Scheme is that full details of each individual item purchased and sold has to be recorded. Global Accounting is an optional, simplified variation of the Second Hand Margin Scheme. It differs from the standard Margin Scheme in that rather than accounting for the margin achieved on the sale of each individual item, output tax is calculated on the margin achieved between the total purchases and total sales in a particular accounting period.

Advantages

  • Simplified version of the Margin Scheme
  • Record keeping requirements reduced
  • Losses made on sales reduce VAT payable
  • Beneficial for businesses which buy and sell bulk volume, low value eligible goods

Disadvantages

  • Cannot be used for; aircraft, boats, caravans, horses or motor vehicles
  • Similar to Margin Scheme disadvantages apart from loss set off

VAT Schemes for Retailers

It is usually difficult for retailers to issue an invoice for each sale made, so various retail schemes have been designed to simplify VAT. The appropriate scheme for a business depends on whether its retail turnover (excluding VAT) is; below £1m, between £1m and £130m and higher.

Smaller businesses may be able to use a retail scheme with Cash Accounting and Annual Accounting but it cannot combine a Retail Scheme with the Flat Rate Scheme.  However, retailers may choose to use the Flat Rate Scheme instead of a Retail Scheme.

Using standard VAT accounting, a VAT registered business must record the VAT on each sale. However, via a Retail Scheme, it calculates the value of its total VAT taxable sales for a period, eg; a day, and the proportions of that total that are taxable at different rates of VAT; standard, reduced and zero.

According to the scheme a business uses it then applies the appropriate VAT fraction to that sales figure to calculate the output tax due. A business may only use the Retail Scheme for retail sales and must use the standard accounting procedures for other supplies.  It must still issue a VAT invoice to any VAT registered customer who requests one.  It is a requirement of any scheme choice that HMRC must consider it fair and reasonable.

Examples of Retail Schemes

  • Apportionment
  • Direct calculation
  • The point of sale scheme

There are special arrangements for caterers, retail pharmacists and florists.

Advantages

  • No requirement to issue an invoice for each sale
  • Most schemes are relatively simple to administer once set up. Technology assists in a helpful way with EPOS systems
  • Simplifies record keeping

Disadvantages

  • It is usual for each line sold to need to be coded correctly for VAT liability
  • Smaller businesses without state of the art technology may be at a disadvantage
  • Time and resources required to set up and maintain systems
  • In some cases the calculation depends on staff “pressing the right button”
  • Often complex calculations and record keeping
  • Very precise and complicated rules
  • Lack of understanding by a number of  inspectors
  • Complexity increases the risk of misdeclaration

Overall

As may be seen, there are a lot of choices for a business to consider, especially a start-up.  Choosing a scheme which is inappropriate may result in VAT overpayment and a lot of unneeded record keeping and administration.  There are real savings to be made by using a beneficial scheme, both in terms of VAT payable and staff time.

We are happy to review a business’ circumstances and calculate what schemes would produce the best outcome.

Please contact us if you require further information.

VAT treatment of coronavirus grants

By   6 April 2020
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HMRC has announced that it will be providing assistance for the self-employed affected by coronavirus by way of support grants.

Flat rate scheme (FRS) treatment

The FRS applies to all income received by a business (even exempt and zero rated) however, because the grant is not a supply for VAT purposes – because nothing is done in consideration for the payment, income from this source is not covered by the FRS. Consequently no output tax is due on the receipt of these payments and the value should not appear on VAT returns.

This is also the case for any businesses not operating the FRS.

Input tax

In either case, the receipt of a grant should not affect the businesses’ ability to recovery input tax.







VAT Payment Problems – Q & As

By   12 November 2019
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If you can’t pay your VAT bill, please do not put your head in the sand, the problem will not go away.  Here are some answers to the most commonly asked VAT payment problems.

Q: I have received a demand notice for payment of VAT. Why?

A: HMRC have not received payment of the VAT liability that is described in the demand notice. You should therefore pay the outstanding debt without delay so as to avoid further recovery action. HMRC take prompt action to recover debts.

Q: I am not able to pay the debt immediately because of a temporary cash-flow problem. What should I do?

A: You should make urgent contact with your bank or your financial adviser to explore means of overcoming these temporary financial difficulties.

Q: I have consulted the bank/financial adviser, but they are unable to help. What else can I do?

A: Without further delay contact the Regional Debt Management Unit whose address appears on the demand notice. They may be able to help you by agreeing a brief period in which to pay the debt. They are usually helpful and will consider carefully all practical options for settlement. However, if these do not produce a solution or they do not receive a response to their request for payment, they may, like other creditors, take action to recover the money they are owed.

Q: What is the Default Surcharge?

A: Default Surcharge is a civil penalty to encourage businesses to submit their VAT returns and pay the tax due on time.

Q: When will a Default Surcharge be issued?

A: A business is in default if it sends in its VAT return and or the VAT due late. No surcharge is issued the first time a business is late but a warning (a Surcharge Liability Notice) is issued. Subsequent defaults within the following twelve months (the “surcharge period”) may result in a surcharge assessment. Each time that a default occurs the surcharge period will be extended. There is no liability to a surcharge if a nil or repayment return is submitted late, or the VAT due is paid on time but the return is submitted late (although a default is still recorded).

Q: How much is it?

A: The surcharge is calculated as a percentage of the VAT that is unpaid at the due date. If no return is submitted the amount of VAT due will be assessed and the surcharge based on that amount. The rate is set at 2% for the first default following the Surcharge Liability Notice, and rises to 5%, 10% and 15% for subsequent defaults within the surcharge period.  A surcharge assessment is not issued at the 2% and 5% rates if it is calculated at less than £200 but a default is still recorded and the surcharge period extended. At the 10% and 15% rates the surcharge will be the greater of the calculated amount or £30.

Q: What sort of assessments are sent out?

A: An assessment may be issued if a VAT return is not submitted by the due date. The amount may be based on previous returns. If a business does not submit its returns time after time, the assessment value will increase. An officer may also issue an assessment after a visit, if they have found errors in the amount of tax declared on previous returns. Both types are included in the taxpayers’ debt and are collected in the normal way if they are not paid promptly.

Help 

There are a number of schemes available which may help cashflow or possibly reduce the amount of VAT you pay.

Cash Accounting – where you only pay VAT to HMRC when you have received payment from your customer.

Annual Accounting – where you make set monthly payments and make one return a year with an adjusting payment.

Flat Rate Scheme – where you pay a set percentage of your turnover rather than calculating output tax less input tax.

Bad Debt Relief – where you are able to reclaim VAT relief on your bad debts.

Please contact us if VAT payments are proving a problem for your business.  Negotiation with HMRC is possible.