VAT schemes – which one is right for you?

If your limited company is approaching the VAT registration threshold, or you are already VAT registered, ensuring you choose the correct VAT scheme for your business is more than just a compliance task. By having the correct scheme you can improve your cash flow, reduce admin, and even lower your VAT bill.

In this blog we explore the main VAT schemes available, who they are best suited to, and how to decide which one is the right choice for your business.

Standard VAT Accounting Scheme

Under the standard scheme, you account for VAT on your invoices at the point of issue and reclaim the VAT on purchases when you receive invoices from your suppliers.

Who is it for: The Standard VAT accounting scheme is best for companies with high input VAT to reclaim, and companies which issue invoices regularly and have reliable bookkeeping.

What are the pros: It allows for the full VAT recovery on eligible purchases and matches up well with accrual-based accounting.

What are the cons: It can lead to cash flow pressure, as you may end up paying VAT before your client pays you.

Cash Accounting Scheme

You only pay VAT to HMRC when your client pays you, and you are only able to reclaim VAT on purchases when you pay your suppliers.

Who is it for: Those who have delayed invoice payments, and companies that have lower input VAT or minimal stock.

What are the pros: It improves cashflow and there is less risk of paying VAT on unpaid invoices.

What are the cons: It can’t be used if your VAT-taxable turnover exceeds £1.35million.

Flat Rate Scheme (FRS)

Instead of calculating VAT for each individual sale and purchase, you pay a fixed percentage of your gross turnover to HMRC. The percentage you pay depends on your business type.

Who is it for: Freelancers, contractors or service-based businesses with low expenses, and small businesses with an annual taxable turnover of £150,000 or less. Once you’re on the FRS scheme, you can remain on this unless your turnover is going to exceed £230K.

What are the pros: It allows for simplified VAT reporting, and provides the potential to save money, especially in your first year of VAT registration, where you will receive a 1% discount.

What are the cons: You can’t reclaim VAT on most purchases, and if you buy a lot of equipment or stock, it may not be cost-effective. You can, however, reclaim VAT on certain capital assets, provided they are £2,000 or more.

Annual Accounting Scheme

You submit one annual VAT return, instead of quarterly. Payments are made in advance either monthly or quarterly, based on your estimated VAT liability.

Who is it for: Stable businesses that want to reduce their admin, and those that prefer predictable cash flow.

What are the pros: There’s less paperwork and better budgeting with regular payments.

What are the cons: It can result in over or underpayments, if income varies significantly and if you regularly reclaim VAT, the scheme won’t suit you as you will only be able to receive 1 refund a year.

VAT Margin Scheme

Is a scheme used solely by those businesses which sell second-hand goods, antiques or art. You pay VAT on the difference between what you paid and what you sold the item for, not the full sale price.

Who is it for:

What are the pros: It reduces VAT liability on resale items and is useful for low-margin reselling businesses.

What are the cons: It requires complex record-keeping, and you’re not able to reclaim VAT on purchases covered by the margin scheme.

Which of the VAT Schemes is the right one for you?

It depends on your business model, your turnover, expenses, and how you manage your cash flow. Here are some simple guidelines:

Business Type Recommended Scheme

Freelancer/contractor Flat Rate Scheme (if your expenses are low)

Retail/stock-based business Standard or Margin Scheme

Growing Small Business Cash Accounting or Annual Accounting

Established limited company Standard Scheme

How your Client Director can help you

Choosing the incorrect VAT Scheme can cost you hundreds if not thousands over time. If you’re new to running a limited company, your Client Director will provide you with personalised advice based on your circumstances as to which scheme is best for you.

As your business grows or if you’re switching over to us from another accountancy, your Client Director will review your scheme based on your business’ finances, industry and growth plans, and make suggestions complimenting your business’ success.

As always, they are here to offer you tailored advice, to help you make the most of your business. Get in touch with them directly today.