Ask The TaxWise Expert: What schemes can help with the payment of VAT for a small business?

Peninsula Team

June 29 2012

Q: I run a small business and am finding that my customers are taking longer to pay me. This is affecting my cash flow and I find it difficult to pay the VAT due to HMRC. Are there any schemes that will help me? A: There are a number of schemes available to businesses that can help businesses like yours. They are cash accounting, annual accounting and the flat rate Scheme. Cash accounting allows a business to account for VAT (output tax) on your sales on the basis of payments you receive, rather than on tax invoices you issue. This is different from the normal rules that require you to account for VAT on your sales when you issue a VAT invoice, even if your customer has not paid you. However, if you choose to use the scheme, you can only reclaim the VAT incurred on your purchases (input tax) once you pay your supplier. Under the normal method of accounting for VAT you can reclaim VAT on purchases you make as soon as you receive a VAT invoice even if you have not paid your supplier. The advantages of using the scheme include: • Helping with your cash flow as you do not have to pay VAT to HMRC until the customer pays you. • If you give your customers extended credit VAT is not due to HMRC until you receive payment from the customer. • There is a build in bad debt relief. To join the scheme a business has to meet the following conditions: • The value of its taxable supplies in the next year will be £1,350,000 or less. • Have no outstanding VAT returns. • Have not been convicted of a VAT offence in the last year • Have accepted an offer to compound proceedings in connection to a VAT offence in the last year. • Have been assessed for a penalty for VAT evasion involving dishonest conduct in the last year. Annual Accounting allows a business to complete one VAT return each year whilst making interim payments on account. At the end of the annual VAT accounting period the business has two months to complete and submit the annual VAT return to HMRC with any balancing payment. The advantages of using the scheme include: • Helping out with your cash flow by paying a set amount each month or quarter. • Have the ability to make additional payments as and when they can be afforded. • Have the same VAT year as your financial year end and so simplify your end of year routines. To join the scheme a business has to meet the following conditions: • The value of its taxable supplies for the 12 months from the date of the application will not exceed £1,350,000. • The VAT registration is not a group registration • The business has not stopped using annual accounting in the twelve months preceding the date of application. Flat rate Scheme this scheme was devised to help small businesses by taking some of the work out of recording VAT on sales and purchases. Businesses using the flat rate scheme pay VAT as a fixed percentage of your VAT inclusive turnover. The actual percentage that you use depends upon the type of business you run. HMRC have looked at all businesses and calculated a VAT percentage for each business category based upon the amounts of output tax that the business would normally pay to HMRC less an allowance for the input tax it would normally reclaim. Therefore input tax is not recoverable. However if a business incurs a single purchase of capital expenditure goods of £2000 including VAT then the VAT can be reclaimed. The advantages of using this scheme are: • Time is saved by not having recording VAT on sales and purchases. • Less time taken completing your VAT return at the quarter end. • May help with cash flow as you can easily calculate how much VAT you owe on your takings. Some businesses will have a little additional work. If your customers are VAT registered you will still need to issue VAT invoices showing VAT in the normal way. Also businesses who buy and sell goods from outside the UK can find the scheme more complex. To be eligible to use the scheme your turnover must be no more than £150,000 a year excluding VAT. Can the schemes be used together? Annual accounting can be used with both cash accounting and the flat rate scheme. If you are using the flat rate scheme you cannot use cash accounting scheme, but there is cash based method of accounting similar to cash accounting that can be used instead. The three schemes have only been briefly discussed if you would like any more information give us a call at the Advice Line on 01455 852555.

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