At JSA we are often asked by contractors operating through their own limited company which VAT scheme they should operate. There are various schemes open to contractors who wish to or have to register their business for VAT, each with their pros and cons.
The majority of businesses will operate a standard VAT scheme, which means VAT is applied to all sales invoices (known as output VAT) and recognised in a quarterly VAT return. The net difference between the amount of VAT charged on sales in the quarter and VAT paid (input VAT) on invoices for supplies bought in the same quarter is paid over to HMRC, usually within a month after the end of the VAT quarter.
This scheme is similar to the standard scheme, however the business only accounts for output VAT when the invoice is settled by the customer. This works well for businesses whose clients might be unreliable when it comes to payment but input VAT may not be recognised until the supply has been paid for. This means it may not be suitable for a business that regularly claims more VAT than it pays or if the business buys a lot of goods or services on credit.
Flat Rate Scheme
This scheme is aimed specifically at the smaller business, designed to help reduce the amount of time and administration needed to account for VAT. Very simply, the business does not need to calculate VAT on every sale and purchase. Rather, the business spays a flat percentage of turnover as VAT to HMRC. The percentage paid is less than the standard rate of VAT (currently 20%) because the business is not claiming any VAT on purchases. The flat rate paid depends on the industry and is decided by HMRC. The obvious benefit of the flat rate scheme is that it is easier to follow and less time consuming. The disadvantage is that a business that buys a lot of goods and services from VAT-registered businesses could end up paying more VAT.
Under this scheme the business need only submit one VAT return per year, instead of four, and the VAT can be paid in fixed monthly or quarterly instalments. This might make it easier to manage cash flow but if the business regularly reclaims VAT it will only get one repayment per year. You can use the Annual Accounting Scheme if your estimated VAT taxable turnover for the coming year is not more than £1.35 million and you can continue to do so as long as your estimated turnover remains below £1.6m. This scheme is not available to businesses that are not up to date on VAT payments.
If your turnover exceeds £81k in a twelve month period, you’ve no choice, you have to register for VAT. Below that threshold, the decision is ultimately yours (see VAT Part 1), and depending on the profile of your business one of the alternative schemes to the Standard VAT scheme may be appropriate. JSA are able to advise on which of these schemes will be best for you, to find out more, contact 0800 25 26 40 today.