Is the VAT accrual scheme cruel?
Posted on 12th May 2023
You should know about the VAT accrual scheme if you are already registered or will soon register for VAT.
If your turnover in the last twelve months is approaching or has already reached £85,000 you’ll need to register for VAT. Some companies also apply for voluntary VAT registration below this threshold.
As a VAT registered business, you’ll charge your customers on taxable goods and services, less any VAT you pay. If more VAT is charged than paid then the balance goes to HMRC. If more VAT is paid than charged, you can reclaim the difference provided you have valid receipts.
You can register for different VAT schemes. Once you have chosen a scheme, you can’t change without HMRC approval.
Once registered, your VAT returns to HMRC are due one month after the end of each VAT period. These are usually three months long (from 1 March to 31 May, for example). Your payment to HMRC is due a week later. To avoid pressure on your business finances, it’s a good idea to put money aside for VAT as you go. If possible you should use a separate bank account, so you’ll be sure to have enough to pay what’s due.
The accrual VAT scheme
This scheme uses the issue dates for invoices, regardless of whether they are paid.
For example, if you issue an invoice in March but don’t receive payment until July, VAT must still be paid to HMRC for the March period.
If you can manage when you receive and issue invoices you’ll have more control over your VAT payments. However, you can’t simply change invoice dates to help manage your VAT liabilities. As soon as invoices are issued or received the date on the document must be used.
If you have a cast-iron process for controlling your purchase and sales invoices this could work well for you. However, if receipts or invoices are mislaid it’s a real headache, especially during HMRC audits.
You can record payments on account for missing documents until you find them. However, if this is outside your VAT period a late claim will be needed to reduce the VAT you pay.
The cash VAT scheme
Alternatively, you can base your VAT returns on invoice payment dates, regardless of the date on the document. However, you can’t control when suppliers send their invoices and customers pay their accounts. This can lead to peaks and troughs, making it harder to manage your VAT payments and cashflow.
Other VAT schemes
Flat rate – you can pay a fixed percentage on turnover where VAT applies. The rate will depend on your industry sector. HMRC will agree the rate in advance and confirm it when you join the scheme. You won’t generally claim VAT on your purchases and your turnover must be £150,000 or less per year.
VAT retail – similar to the flat rate scheme, your taxable sales for each period are based on total sales at different tax rates.
VAT margin – you can pay VAT on the margin you make from selling a product. Only certain types of goods are eligible for this scheme.
Annual accounting – making VAT payments annually rather than quarterly or monthly suits some businesses. However, the final liability is for a much bigger lump sum. You can only join the annual accounting scheme if your estimated taxable turnover is £1.35 million or less and your actual turnover stays below £1.6 million.
Which scheme will suit your business?
The main difference between the accrual and cash schemes is the timing of VAT payments and claims. The best option depends on your business and the credit arrangements you have with your customers and suppliers.
Some business sectors have lengthy credit arrangements and high value invoices. A cash scheme might be best because your VAT payments are based on the dates invoices are paid. However, if you have already paid VAT to your suppliers it’s difficult to keep track. If you normally pay your suppliers immediately the accrual scheme allows you to reclaim the VAT straight away to offset against the tax on your sales.
If your business is approaching the VAT threshold and you would like to know more about the different schemes just get in touch.
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