VAT schemes are optional methods that help VAT-registered businesses simplify how they calculate and report VAT to HMRC. These schemes do not change the VAT rate you charge customers. They only change how you calculate and pay VAT to HMRC.
Each scheme has eligibility rules based on turnover and business type.
Know More About VAT via the Official Government Website and calculate VAT
VAT Flat Rate Scheme
The VAT Flat Rate Scheme allows small businesses to pay VAT as a fixed percentage of their gross turnover instead of calculating input VAT and output VAT separately.
You can join if your annual taxable turnover is £150,000 or less (excluding VAT).
Under this scheme:
- You still charge customers the normal VAT rate (usually 20%).
- You pay HMRC a fixed percentage based on your industry.
- You usually cannot reclaim VAT on purchases (except certain capital assets over £2,000).
The percentage you pay depends on your trade sector. For example, different rates apply to consultants, retailers, and contractors.
Example
A consultancy charges £10,000 + VAT (20%).
Customer pays £12,000 total.
If the flat rate for that industry is 14.5%:
VAT payable = 14.5% × £12,000
VAT due = £1,740
The difference remains with the business, but input VAT recovery is limited.
Flat Rate Scheme Eligibility Summary
VAT Annual Accounting Scheme
This scheme allows eligible businesses to submit one VAT return per year instead of four quarterly returns.
You can usually join if your annual VAT taxable turnover is £1.35 million or less.
Under this scheme:
- You make advance payments towards your annual VAT bill.
- You submit one annual return to finalise your VAT position.
This can improve cash flow planning and reduce paperwork.
Annual Accounting Key Points
VAT Cash Accounting Scheme
The Cash Accounting Scheme allows businesses to account for VAT when money is actually received or paid, rather than when invoices are issued.
You can usually join if your annual VAT taxable turnover is £1.35 million or less.
Under this scheme:
- You pay VAT to HMRC only when customers pay you.
- You reclaim VAT only when you pay your suppliers.
This helps protect cash flow, especially if customers pay late.
Cash Accounting Summary
VAT Margin Scheme
If you sell second-hand goods, antiques, works of art, or collectibles, you may use a VAT margin scheme.
Instead of paying VAT on the full selling price, you pay VAT only on the profit margin (the difference between purchase price and selling price).
Example
You buy goods for £5,000.
You sell them for £7,000.
Margin = £2,000
VAT is calculated only on that £2,000 margin, not on £7,000.
This prevents VAT being charged twice on the same goods.
VAT Retail Schemes
Retail businesses making many low-value sales can simplify VAT calculations using one of three retail schemes.
These allow businesses to calculate VAT once per VAT return period instead of calculating VAT for each individual sale.
Retail schemes are designed for businesses such as shops and supermarkets that process high transaction volumes.