I am sure you know about the different VAT rates; that’s easy. And perhaps you heard about the concept of Zero rated and exempt – well it is getting more confusing. In addition to the standard VAT scheme, there are a number of alternative VAT schemes available to small businesses designed to simplify accounting and improve cash flow:
• Flat Rate VAT – This method works by simply calculating your VAT as a percentage of your turnover. You charge VAT as normal, but the percentage you pay HMRC is called the Flat Rate VAT and the rate depends on the type of industry you operate in.
• VAT cash accounting – VAT is calculated on payment dates rather than using the tax date of the invoice. This can help improve cash flow as you will not have to pay VAT on sales you have not received payment for.
• Annual accounting – As the name suggests a single VAT return is submitted annually simplifying your VAT accounting. Payments are made on account quarterly during the year with a final balancing payment at the end. This can be used in combination with cash accounting and flat rate accounting mentioned above.
• Retail schemes – Intended for retail businesses, these schemes make calculating VAT simpler when there are a high number of low value transactions. There are 3 standard VAT retail schemes depending on the business you run.
• Margin schemes – Designed for businesses that trade second hand goods where there is no input VAT to reclaim on the purchase. It allows you to only pay VAT on the profit i.e. “margin” of the sale. One of the benefits means you will not pay VAT for a sale that does not make a profit.
I cannot tell you why it is so complicated but your accountant can give you further guidance. We would like you to contact an AIMS Accountant for more information about the availability and restrictions of any of these schemes – but in in any case make sure you ask a qualified accountant.