VAT Schemes

There are a number of schemes available to simplify VAT administration.

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Optional flat rate scheme

Businesses with a taxable VAT exclusive annual taxable turnover of up to £150,000 and whose total VAT exclusive turnover (including the value of exempt and non taxable income) does not exceed £187,500 can join the flat rate scheme. (subject to certain exclusions , such as those using the second hand or capital goods scheme, those convicted of VAT offences and group companies).

Instead of calculating input and output VAT those using the scheme calculate the VAT payable by applying the appropriate flat rate for their trade sector to the VAT inclusive value of their business supplies in the period including reduced rate, zero rate and exempt supplies.

Supplies are invoiced in the normal way showing the normal VAT rate.

The business retains any VAT charged to its customers but does not make a separate claim for input tax charged as this is covered by the flat rate.

If the business acquires capital goods in the period with a tax inclusive value of more than £2000, it may recover the input tax on them. If the goods are subsequently sold, VAT must be accounted for at the full rate not the reduced rate.

Once the scheme has been joined a business may stay on this scheme providing its turnover does not exceed £225000 in any 12 month period. If a business expects to exceed £225000 turnover in any 3 month period it must leave the scheme immediately.

Who cannot Join the scheme?

You cannot join the scheme if any of the following apply:

• The business is not registered for VAT
• The business is using the second-hand margin scheme
• The business is required to operate the tour operators margin scheme
• The business is required to operate the Capital Goods Scheme for certain capital items
• The flat rate scheme has stopped being used in the 12 months prior to the date of a new application
• In the last 12 months before an application the business has either accepted a compound penalty or been convicted of an offence in connection with VAT or been assessed with a penalty for any conduct involving dishonesty
• The business is or has been, within the last 24 months, registered for VAT in the name of either
• a VAT group
• a division

The business is associated with another in any of the following ways

• A business is under the dominant influence of another
• Two businesses have close financial, economic and organisational links or
• Another company has the right to direct the business applying
• In practice the business complies with the directions given by another. The test involved here is one of commercial reality rather than legal.

Advantages

• There is no need to separate out gross, VAT and net in the business accounts
• No problems in deciding what input tax can and cannot be reclaimed
• Less chance of making mistakes in calculating VAT liability
• Less work doing the books
• Can be used in conjunction with the annual accounting scheme

Disadvantages

• The business cannot claim input tax so it loses some cash flow in VAT on stock waiting to be sold
• The lesser requirements to keep VAT records make it more difficult to continue to monitor whether the scheme is still advantageous

Annual Accounting Scheme

Businesses with an annual tax exclusive turnover of up to £1350000 that have been registered for at least one year may apply to join the annual accounting scheme. The business agrees a provisional VAT liability with Customs and Excise based on the previous year.

Businesses with a taxable turnover of £150,000 or less can join the scheme as soon as they are registered with their provisional figure being estimated.

For businesses with a turnover above £150,000, the agreed provisional liability is divided by ten. Nine equal monthly payments are made by direct debit starting four months after the beginning of the year.

Businesses with a turnover below £150,000 can make quarterly payments that are 25% of the provisional VAT liability.

The annual return and the balancing payment has to be made within two months of the year end. Once a company joins the scheme it can remain in it unless its annual turnover reaches £1600000.

Advantages

• An eligible business can choose an annual accounting year which best suits its business needs
• The annual VAT return and balancing payment will be due two months after the end of the annual accounting period instead of one with the standard scheme.
• A business will only have one vat return to complete rather than four on the standard scheme.
• The business can measure its cash flow with more certainty by paying a known set amount each month rather than having the potential surprise of a large bill at any time.

Disadvantages

• Traders who are due a repayment will not need to make monthly repayments but will not receive a repayment until their return is made
• The business still has to maintain its VAT records (compare with flat rate scheme)

Cash Accounting

Providing a business is up to date with its tax returns, has paid over all of their VAT or have made arrangements to pay the outstanding VAT by installments and has a turnover which is not more than £660,000, it can improve its cash flow by not having to account for its output tax until the cash is received. On the other hand input tax is not recoverable until suppliers are paid.

Businesses cannot use the scheme for hire purchase, goods and services invoiced in advance of the supply or where payment is not due for more than six months after the invoice date.

Assessments

If a taxpayer fails to make a return or Customs and Excise considers that the return is incomplete or incorrect, they may issue assessments of the amount of VAT due. These assessments must normally be issued before the expiry of two years from the end of the return period or within twelve months after the facts become known, whichever is the later.

Where a taxpayer has died, no assessment can be made later than three years after death nor relate to a period more than three years before death.

Where an assessment has been made the taxpayer must still provide a return and should notify Customs and Excise within 30 days where the correct amount payable exceeds the assessment.

Interest, penalties and surcharges

In addition to their right to commence criminal proceedings (for other than regulatory offences), Customs and Excise can charge interest on overdue tax and can impose penalties for

• Late, incorrect or incomplete returns
• For failure to notify liability to be registered for VAT
• Issuing unauthorised VAT invoices
• Failure to keep proper records (which have to be retained for six years

European Union Single Market

Supplies of goods between EU countries are not regarded as imports and exports but as acquisitions and supplies. If a supplier in another EU country supplies goods totaling more than £70,000 in a calendar year to non-registered persons in the UK (known as distance selling), the supplier is liable to register in the UK within 30 days of exceeding the limit.

If a UK non-registered business makes acquisitions from other EU countries in excess of the stipulated threshold, the registration and de-registration provisions stated above apply.

When a VAT registered person acquires goods in the UK from an EU supplier, output tax must be accounted for on the next VAT return, but wit an equivalent amount being deducted as input tax on the same return.

Supplies by a UK supplier to VAT registered EU customers are zero rated. A UK seller must state both his own and his customers VAT number on VAT invoices. In addition to his normal VAT return the supplier has to submit a return of all supplies to VAT registered customers in the EU for each calendar quarter (known as an EC Sales list)

 

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