In this section:
- VAT accounting schemes: the basics
- Annual accounting VAT scheme
- Cash accounting VAT scheme
- Flat rate VAT scheme
- VAT retail schemes
- VAT margin schemes for second-hand goods, art, antiques
VAT accounting schemes: the basics
In contrast to standard VAT accounting, there are several alternative ways you can account for VAT that could save you time and money.
Some of these VAT accounting schemes have been designed for specific trade sectors. Others have been designed to deal with more generic business issues. Some of the schemes can be used together.
This guide provides an overview of each of the schemes, and gives you some idea of who the schemes are suitable for. For more information on any of these schemes, follow the links to the guides listed at the end of each section.
On this page:
- Annual accounting for VAT
- Cash accounting for VAT
- The flat rate VAT scheme
- VAT schemes for retailers
- Margin schemes for second-hand goods, art, antiques, collectibles
- Tour operators' margin scheme
Annual accounting for VAT
Using annual accounting for VAT, you pay VAT on account throughout the year in nine monthly or three quarterly instalments. These instalments are based on the VAT you paid in the previous year. If you have been trading for less than a year, the instalments are based on an estimate of your VAT liability.
You only need to complete one VAT return at the end of the year. If you have not paid enough VAT on account you make a balancing payment to HMRC. If you have overpaid, you claim a refund from HMRC.
Annual accounting can reduce your paperwork because you only need to complete one annual VAT return instead of four quarterly VAT returns. It can also make it easier to manage your cash flow. However, it does not remove the requirement to keep all required VAT records and accounts.
Annual accounting is not suitable for businesses that regularly reclaim VAT as you would only get one repayment at the end of the year.
Another disadvantage of annual accounting is that if your turnover decreases, your interim payments may be higher than under the standard VAT accounting.
Find out more about annual accounting for VAT
Cash accounting for VAT
Usually VAT is payable when an invoice is issued. In contrast, using cash accounting for VAT, you do not need to pay VAT until your customer has paid you. But you also cannot reclaim VAT on your purchases until you have paid for them.
Cash accounting can be beneficial for your cash flow especially if your customers are slow to pay. It is even more useful if you have bad debts. Under standard accounting for VAT, you are liable for the VAT on the debt even if you never receive the payment from your customer. Using the cash accounting scheme, you do not pay the VAT if your customer never pays you.
The cash accounting scheme may not be for you if you regularly reclaim more VAT than you pay, or if you buy a lot of goods and services on credit.
Find out more about cash accounting for VAT
The flat rate VAT scheme
The flat rate VAT scheme is designed to help small businesses reduce the amount of time they spend accounting for VAT.
Using the flat rate scheme you do not have to calculate the VAT on each and every transaction. Instead, you simply pay a flat rate percentage of your turnover as VAT.
The percentage is less than the standard VAT rate because it takes into account the fact that you are not reclaiming VAT on your purchases. There is a range of flat rate percentages - the one you use depends on your trade sector.
Find the right flat-rate percentage for your business in VAT Notice 733
Although the flat rate VAT scheme can reduce your paperwork, one downside is that you cannot reclaim VAT on your purchases. If you buy a lot of goods and services from VAT registered business, you could end up paying more VAT. Also, if you make a lot of zero-rated or exempt sales, you could end up paying more VAT because you will still be liable to pay the flat rate percentage on your turnover for those sales, even though you are not charging VAT on those sales.
Find out more about the flat-rate VAT scheme
VAT schemes for retailers
Retailers, especially those who sell a high volume of low value goods to the general public, can find it very time consuming and costly to issue VAT invoices for every sale. The VAT retail schemes enable retailers to aggregate their sales and account for VAT on the total.
There are a number of different standard retail schemes, and depending on your business, you may be able to create a bespoke VAT retail scheme. If your turnover is over certain limits, you must use a bespoke scheme.
The main retail schemes are:
- apportionment schemes
- direct calculation schemes
- the point of sale scheme
The standard retails schemes are suitable for most retailers. There are special rules for:
- caterers and catering
- chemists (retail pharmacists)
- concessions/shops within shops
- florists
- garden centres
- hampers, eg for Christmas clubs
- manufacturing retailers
- petrol stations
- sub-post offices
Find out more about the various retail schemes
Margin schemes for second-hand goods, art, antiques, collectibles
Using standard VAT accounting, you pay the VAT to HMRC that you charge on your sale price, and reclaim the VAT from HMRC that you are charged on your business purchases. If you buy and sell second-hand goods, works of art, antiques or collectibles, the VAT that you can recover may be limited.
Margin schemes solve this problem because instead of calculating VAT on the full sale price of an item, you calculate the VAT on the difference between the purchase price and the sale price - the margin.
You can use the margin schemes on some goods and normal VAT accounting on others, and you can still reclaim VAT on your purchases for other business expenses, such as overheads, repairs, parts or accessories.
The main disadvantage of using the second-hand et al schemes is that you need to keep very detailed records. If you don't do so, you will be liable for VAT on the full selling price.
There are special margin schemes for:
- agents
- auctioneers
- businesses trading in horses and ponies
- motor traders
- pawnbrokers
- shares and joint purchases
Find out more about the various margin schemes
Tour operators' margin scheme
Tour operators often buy goods and services from businesses in foreign countries, and cannot often reclaim their input tax. The Tour Operators' Margin Scheme solves this problem by allowing tour operators to calculate the VAT on just the value that they add.
