Her Majesty's Revenue & Customs (HMRC) are responsible for applying the law in the case of VATand there is a great deal of information available on their web site. What we provide here is an outline of the important issues regarding the VAT Return and how it must be presented

Once registered you will have the opportunity to choose a scheme for making your return and payments

With Standard Accounting for VAT, the VAT becomes payable when an invoice is provided. For 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 cash flow especially if you have slow paying Customers and 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.

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 will 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 paperwork because you only need to complete one annual VAT return. However, it does not remove the requirement to keep all required VAT records and accounts in accordance with the standard scheme

Annual accounting is not suitable for businesses that regularly reclaim VAT since such a repayment would be made 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

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.

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.

There are VAT Schemes for 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

Margin Schemes for second-hand goods, art, antiques, collectibles provide a way to allow for the limited VAT that you can reclaim. VAT is payable 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 margin 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

See also

VAT Accuracy
VAT Overseas
VAT Penalties
VAT Records
VAT Taxables

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Last Update 08-Jan-2012

Date first published 18-Dec-2005