If your business’ annual turnover eclipses a specific threshold (currently £85,000), you will have to register for Value Added Tax (VAT), which could raise tax costs for your firm. As a small business owner, however, there are various VAT schemes, other than standard accounting, which you can use to reap serious savings on VAT, reducing your outgoings so you can invest in making your company a success.
Flat Rate Scheme
You can enter the Flat Rate Scheme (FRS), if a) your taxable turnover (net of VAT) is less than £150,000, and b) your total turnover (including exemptions) is under £187,500. Under the FRS, you add 20% VAT when preparing invoices, then apply the relevant flat rate (which depends on your type of trade) to this ‘gross invoice amount’ and this is the total VAT you pay to HM Revenue and Customs (HMRC).
You can use the FRS to reduce your VAT bill, as it was designed to help small businesses lower their admin and time costs. Also keep in mind that the VAT rate you use under the FRS depends on your type of business activity. After your rate is set, you will get a further 1% discount for your first year in the scheme, helping you cut your VAT bill further. Let’s say, for example, you are an accountant – your FRS VAT rate would be 14.5%, but in your first year you would pay VAT at 13.5% with the discount.
We should warn you, however, that with the exception of capital expenditures of £2,000 or more, you cannot claim VAT expenses under the FRS, limiting your savings. Also if you earn £225,000 on an ongoing basis, you will become ineligible for the scheme.
Cash Accounting Scheme
If your business earns under £1,350,000 in taxable turnover, you can enter the VAT Cash Accounting Scheme (CAS). Instead of paying VAT based on the invoices sent and received, you will calculate your bill based on the payments you have sent and received, so you submit VAT payments in arrears. You can use this scheme to find relief from bad debts, as if your customer does not pay, neither do you. To continue thereafter to remain eligible for the CAS you must not exceed £1,600,000 in total turnover an on ongoing basis.
Annual Accounting Scheme
The Annual Accounting Scheme (AAS), has the same entry requirement as the CAS, and allows you to prepare just one VAT return every year. If you enter the AAS, you will make equal monthly payments, which are based on your total VAT liability for the year before, and you can prepare your VAT return at the end of the financial year, to streamline admin costs. You will find the AAS is a great tool for managing cash flow, as it allows you to factor VAT costs into your financial forecasts long-term.
The AAS does come with one significant risk however – you need to put aside sufficient funds, to meet VAT requirements every month, so if your turnover varies drastically, this could leave you unable to foot the bill. Also if you have just registered for AAS, your payments will begin from months four to 12 of your first year on the scheme, with a final balancing payment on month 14, and your bill will be estimated according to future turnover. You can also do quarterly payments on the AAS instead.
Prepare for VAT
If you want to take advantage of one of these VAT accounting schemes as a small business owner, it is critical that you hire a capable accountant, so they have the experience required to help your firm benefit from these programmes and increase cash flow. You should extensively research any accountant before taking them on, looking at their references, membership of industry bodies and track record for success with existing clients, to ensure you find real value from your accountant.
It is also crucial that you give your accountant the best tools to work with, so they can help you take advantage of small business VAT schemes. It is key that you find the right business bank account for your business, so you can manage your money properly and utilise these schemes to slash outgoings. We supply the advice on UK business banking matters, which you require to find the right account for your company, allowing you to utilise VAT schemes properly and free up cash for your company.
Turner Little
Turner Little was founded in 1998 and it has since become a well-established UK based professional Company Registration Agent, Registered Bank Intermediaries and Business Consultants, as well as Trust provider. You can receive our monthly newsletter by signing up using the form below.