Three Ways to make VAT easy for small businesses
August 2005
Cash Accounting
If your taxable turnover (excluding VAT) will be £660,000 or less during the coming year, you may be eligible to calculate your VAT payments using the cash accounting VAT scheme.
The cash accounting scheme is especially useful for businesses who are owed more, from customers, than they owe their suppliers.
Essentially you pay VAT only when your customers have paid you, not on submission of a sales invoice.
This may improve cash flow and means you only pay over VAT that has already been paid to you. BUT please be aware that you can only claim back VAT on your purchases once you have paid your suppliers.
Annual Accounting
How would you like to minimise the amount of time you spend completing a quarterly VAT return? A solution may be found in the Annual Accounting scheme which allows you to calculate your VAT once a year!
Practically you will need to estimate your VAT for the coming year and pay in monthly (or longer) instalments. The balance will become due with the Return, two months after the end of your accounting year.
A word of caution! If you do use Annual Accounting for VAT, we suggest that you continue to maintain a monthly bookkeeping routine. If you leave everything to the end of the year you will find the filing of your annual return, two months after your year end, difficult to meet! Penalties, surcharges and interest may be charged if you are late.
You can join this scheme if you meet the following conditions:
1. If your expected, taxable annual turnover is £660,000 or less, but more than £150,000 and you have been registered for 12 months already.
2. If your annual taxable turnover is estimated to be under £150,000.
Flat Rate Scheme
If your projected, annual, taxable turnover (excluding VAT) is expected to be less than £150,000, then you could consider the FLAT RATE SCHEME.
Time is saved with this scheme as record keeping is simple - you calculate your total turnover (inclusive of VAT) and apply a flat rate percentage (different rates apply depending on which business sector you belong to). There is potential for a 1% reduction in the rate for the first year of registration.
You can then be certain of what your liabilities will be, although you will not be able to claim back VAT on purchases unless you buy a capital item over £2,000. You must apply to be part of this scheme.
Combine the schemes
You can also use a combination of the above schemes. In this way you can maximise all the benefits:
1. VAT due based on cash received
2. One VAT return per annum
3. Regular monthly payments to ease cash flow.
4. Simplify calculation of VAT due by applying the Flat Rate Percentage.
Call us for advice if you think you could benefit from any of the above schemes - or all!
