Small businesses have several VAT schemes available that can simplify VAT administration and may help with cash flow. However, as a business grows or its circumstances change, it is important to review whether the VAT scheme being used is still the best for your business.
The main VAT special schemes available to small businesses are the flat rate scheme, the annual accounting scheme and the cash accounting scheme. The turnover limits for joining and leaving each scheme vary, so businesses should check that they continue to meet the relevant conditions.
The flat rate scheme is available to businesses that expect their annual taxable turnover in the next 12 months to be no more than £150,000, excluding VAT. Businesses already using the scheme can continue until their turnover exceeds the exit total income threshold of £230,000, including VAT. The scheme simplifies VAT reporting by allowing businesses to pay a fixed percentage of their VAT-inclusive turnover to HMRC, with the percentage depending on the type of business. However, businesses should check whether using the scheme is financially beneficial before applying.
The annual accounting scheme allows eligible businesses to submit one VAT return each year instead of quarterly returns. It can be used alongside the flat rate scheme or with standard VAT accounting. The scheme is available to businesses with taxable turnover of up to £1.35 million and can continue until turnover exceeds £1.6 million.
The cash accounting scheme can improve cash flow by allowing businesses to pay VAT to HMRC when customers have paid them rather than when sales invoices are raised. It is available where estimated VAT taxable turnover is no more than £1.35 million and can continue until turnover exceeds £1.6 million.
Reviewing your VAT arrangements regularly can help ensure you are using the scheme that best fits your business needs.
