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VAT schemes

If you’re registered for VAT, you must submit regular VAT Returns to HMRC. These summarise your income and expenses for the period and any VAT you need to pay or reclaim. It’s important that your VAT Returns are accurate to ensure that you pay what’s due.

You can choose from the following VAT schemes:

Standard VAT

This is the default scheme you’re assigned to unless you state otherwise. On this scheme, you reclaim VAT at the point you receive an invoice from your supplier and pay it when you invoice your customers.

Cash Accounting

Using the Cash Accounting Scheme, you pay VAT when your customer pays you, but you also need to consider that you can’t reclaim VAT on your purchases until you have paid for them.

You can use this scheme if your estimated VAT taxable turnover is not more than £1.35m.

The advantages of this scheme are:

  • It’s good for cash flow, especially if your customers are slow to pay.
  • It’s even more useful if you have bad debts.
  • You don’t pay the VAT if your customer never pays you.

Flat Rate Scheme

The Flat Rate Scheme is designed to help small businesses reduce the amount of time they spend accounting for VAT. Using this scheme, you enter transactions as normal, using the normal VAT rates, but when you create your VAT return, VAT calculates based on your flat rate percentage. Instead, you simply pay a flat rate percentage of your turnover as VAT.

The Flat Rate VAT Scheme can be either invoice based or cash based. You can apply to HMRC to use this scheme if your VAT taxable turnover excluding VAT, is less than £150K.

There’s a range of flat rate percentages; the one you use depends on your trade sector. HMRC will advise you of the rate applicable to your business when you register.

Find out more about Flat Rate VAT

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