VAT Guide

You may also find our Flat Rate VAT Scheme Guide helpful (this is the scheme most Limited Company - Freelancer's, Sole Traders and the Self Employed use).

Which scheme is right for you?

Our easy to read guide gives a full breakdown on how VAT works along with the advantages and disadvantages of using a VAT Scheme.

Standard VAT Accounting

Being VAT registered means you can reclaim VAT on purchases that you have been charged VAT on. Using the standard VAT accounting method means that every quarter you would be required to fill in a standard VAT return form (online only). This must include:

• All output tax – this is the VAT which you have charged to customers/clients on your invoices in the relevant quarter. Whether you have or have not received payment for the goods/services provided, you still must add this to your VAT return form in that quarter.

• All input tax – this is the VAT which you have been charged by suppliers on goods or expenses your business has incurred during the relevant quarter. Again whether or not you have paid for the goods or expenses you must add this to your VAT return form in that quarter.

Using this method means that you would ask to reclaim VAT based on the date of your raised invoice rather than the date the invoice is paid for. For example - if you were completing a VAT return form for the first quarter ending March:

Date invoice raised              Date invoice paid                 Date to file and pay your VAT
11th March                             12th June                                 March (first quarter)

You must include the invoice in the quarter the invoice was raised not the month the payment was received.

Remember...

• You do not have to register for VAT until you reach the £70,000 (2011/2012 tax year) threshold within a 12 month period of your business starting – once this amount is reached it is mandatory to be VAT registered.
• Some companies voluntarily register for VAT – this could be for many different reasons; customers will only do business with VAT registered companies or you may be looking to purchase many goods where VAT is chargeable and can be reclaimed.
• Standard VAT is currently 20% (2011 rate).

Advantages of using Standard VAT Accounting

Even If you have not paid for goods purchased, you can still reclaim the VAT from HM Revenue and Customs in the quarterly VAT return, great for your cash flow.

Disadvantages of using Standard VAT Accounting

You have to pay VAT over to HMRC for service or goods sold which you may have not yet received the money for, not great for cash flow especially for new businesses.

These are our recommended and most commonly used VAT schemes.

Flat Rate Scheme

The flat rate VAT scheme is an incentive provided by the government to help simplify taxes and means you charge VAT on your invoices at 20% (2011) but only pay back HM Revenue and Customs at a lower rate, for Freelancer's specialising in IT (rates differ depending on your profession/trade) the rate in your first year is just 13.5% of the gross amount and 14.5% in subsequent years (you receive a 1% discount in your first year).

This provides the following additional income (based on a 45 week working year):
£200 per day contract - £1,530 extra per year
£350 per day contract - £3,670 extra per year
£600 per day contract - £4,590 extra per year

The FRS is the chosen scheme for most Sole Traders, Freelancers and small businesses. It is also the scheme that is recommended for businesses that have very few VAT chargeable purchases and expenses i.e. don’t buy much stock.

The VAT percentage you pay is considerably lower than that of the standard VAT rate, (visit our Flat Rate VAT Scheme Guide page for a full list of the standard rates depending on your profession) you than keep the difference as your profit. See example below based on a Limited Company specialising in IT:

However, there are certain thresholds which cannot be exceeded, for more information see our detailed Flat Rate VAT Scheme Guide.

And finally….The Cash Accounting Scheme

This scheme cannot be used if your annual turnover is more than £1.35 million. The cash accounting scheme is best suited for businesses who do not wish to pay VAT until their customers or clients have paid for their goods or services. Likewise with goods (like stock) bought for their own company, they cannot ask to reclaim VAT if they themselves have not paid for the goods.

Each quarter you will be asked to fill in your VAT return form for HMRC (online only) stating your output tax and input tax (very similar to that of the standard VAT), however you cannot claim or reclaim VAT on purchases or services that have not yet been paid for.

Here is an example if you were completing a VAT return form for the first quarter ending March:

Date invoice raised                Date invoice paid                 Date to file and pay your VAT
11th March                                 12th June                             June (Second quarter)

Even though the invoice was supplied in March, and technically is in the first quarter cut off, the payment was not received until June, meaning you would not claim back VAT on this invoice until the second quarter. The payment must be received before adding this to your quarterly VAT form.

Advantages of using the Cash Accounting Scheme

• Benefits the cash flow of the business as you will only be required to pay VAT to HMRC once you have received payment from your customers.

Disadvantages of using the Cash Accounting Scheme

• You will not be able to reclaim VAT on any goods purchased until you have actually paid for them.
• If you decide to leave the Cash Accounting scheme, any outstanding VAT will need to be paid to HMRC before you leave the scheme, so make sure to discuss all your VAT scheme options with your accountant before deciding.

We hope the above has given you a clear idea as to which scheme will work best for your business. For more information on VAT visit the following pages:

• VAT Basics
• Flat rate VAT scheme guide

If you have any further questions please do not hesitate to contact Easy Accountancy on: 0500 234111 / 01442 275767 for some free guidance or the option of appointing us as your accountant.