VAT schemes

If you are like just about any other VAT registered self-employed, chances are VAT calculations and returns are something you are dreading to do. It makes your life difficult and it can be quite complicated. Luckily, HMRC has thought of it, and created special schemes, that you can use to make VAT returns a bit easier for yourself. There are three most important schemes. Read on, to find out if any of them is a good solution for your VAT-related headaches.

Cash scheme

To put it simply a cash scheme allows you to return only the VAT you have charged and also received. In a regular VAT return, the amount you have to pay HMRC is the VAT according to the invoices you have received and issued, regardless of whether or not you have actually received the money for your sales, or paid money to your suppliers. On the cash scheme, however, what matters is cash that went in and out of your bank account. The cash scheme is especially beneficial to sole traders, who pay their suppliers on a cash basis but get paid by their customers on credit.

Annual accounting scheme

This scheme is meant to make your life easier by allowing you to file a VAT return only once every year, although it might mean a build-up of records to go through. You will not pay your VAT only once a year though. You will have to make advance payments throughout the year in nine or four instalments, depending on your preference. The amount of the advance payments will depend on your last year's VAT return, or an estimation of your future sales and purchases, if you are only starting up. After you file your VAT return, you will either have to top it up and pay HMRC the balance or will be refunded by them if you have overpaid.

Flat rate scheme

In the flat rate scheme, it doesn't matter how much VAT have you charged for and how much have you paid for your purchases. Every VAT period, you will be charged a flat percentage rate on your total sales. The rate used depends on the type of your business' trade sector.

For example:

You have made sales for £11,000.00 in this VAT period. Because you are a photographer your flat rate is 11%.

You calculate your VAT return like this:

£11,000.00 x 11% = £1,210.00

Even though you pay your VAT at a flat rate of 11%, you charge your customers a regular VAT rate on your invoices. This sounds great, but you have to remember, that you do not include the VAT you have paid for with your expenses in your VAT return calculations unless you have purchased a capital asset that costed you more than £2,000.00 with VAT. This scheme is simplifying VAT calculations and is best for sole-traders, who are selling regular rated products or services, who want to avoid too much admin workload around VAT return deadlines.