Which is the best VAT scheme to use?

There are a variety of different VAT schemes available to use and making sense of which is the best for your business can be quite complex. 

Here’s a brief breakdown of those available and when you should consider using them..

  • Accrual Scheme

VAT is paid when both the customer invoice is raised and supplier invoice is received.  This is most advantageous in industries which do not offer credit and therefore incur the VAT at point of sale.  It is also of benefit if your supplier terms are longer than your customer terms.  (or least your customers pay you quicker than you pay your suppliers)

 Typical business include:  Almost all business to customer trade, restaurants and cafes;  gyms; retail.

  • Cash accounting scheme

An alternate calculation to the accrual scheme is to only recognise VAT when the money is received (and paid).  While the benefits are quite obvious, you only pay the VAT on your sales when you receive the money from your customers,  the downside to this is you can only reclaim the VAT  when you have paid your suppliers.

A useful scheme to have if you have customers with long credit terms. Although a wider look as to why these customers have such terms, and what you can do about it, is equally as beneficial as just changing your VAT scheme… Also handy if your suppliers insist on payments up front.  Many businesses prefer this as it can help with cashflow.
Typical business include: New start up’s

  • Monthly VAT returns

Although it can be an administrative burden this scheme can certainly have its benefits.   If you are usually in receipt of A VAT refund then this is the scheme you should be on. This is common for those businesses with Zero or 5% rated supplies.  

This scheme can also be used in conjunction with others.

Typical business include:  Builders* (new builds / disabled services or other qualify services only);  freight transport; Printing*; Children’s clothing;  Take-aways*

*These areas can be complex and further advice is recommended

  • Flat rate scheme

In contrast to monthly VAT returns this was put in place by HMRC to ease the administrative burden.   A fixed rate % is applied to gross sales to account for both output and input VAT.  The benefits were reduced by the introduction of the limited trader rules (which comes with a fixed % of 16.5) but this is still beneficial if you incur goods (not services) over 2%  of turnover and these goods do not attract VAT.

Typical business include: Contractors; Business to business companies which fall under the VAT threshold.

We would always recommend you seek further advice before choosing the correct VAT scheme.  If you need help with this, or with other advice, then please get in touch…