Whether you carry out your business as a limited company or as a sole trader, it is a mandatory requirement to get registered for VAT in any case. Nowadays several people choose voluntarily register for VAT even in a scenario where they don’t see themselves reaching the taxable turnover threshold anytime soon. It is considered to be a strong strategic business decision. In case you are a beginner who is getting registered for VAT for the very first time, you need to ensure that you have good research about how to choose the right VAT scheme for your business.
In this guide, we have gathered the schemes of VAT that are most common among small business owners. This will help you to pick a suitable option for your business.
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How to Choose the Right VAT Scheme for your Small Business
You are allowed to choose the right scheme of VAT when you initiate the process, it’s a flexible option open for everyone to choose as per their understanding. Moreover, it is important to choose the right option wisely as this will further help you to identify the ways to make calculations about your VAT returns as well as how frequently you are required to file with HMRC.
If you successfully pick the right option of VAT scheme for your business, you will have the benefit of controlling your cash flow in a better way. The most common VAT scenes among the owners of small business owners are listed and explained below for your further understanding.
1- VAT Flat Rate Scheme
If you choose the VAT flat rate scheme, you will find the appropriate VAT rate to charge for the services and products that your business is offering. Further, when the stage comes toward the calculation of VAT to identify how much you owe to HMRC in this regard, you are not supposed to adhere to any other methods like cash accounting VAT scheme method or standard VAT scheme method rather you will adhere to the fixed-rate percentage. This fixed percentage is according to the industry you belong to and HMRC has fixed it. Your final year’s total taxable turnover is required.
The good news is that you will discount this flat rate in case you are in the first year of VAT registration. Moreover, there is an opportunity to save for small businesses in case they choose the VAT flat rate scheme because these fixed-rate are lower than the rates of the standard VAT rate.
2- VAT Annual Accounting Scheme
VAT annual accounting scheme refers to the allowance of filing for VAT returns only a single time within the time duration of a year, unlike standard VAT scheme or cash accounting VAT scheme. Form VAT600 AA is required to be used in case you aim to apply for a VAT annual accounting scheme. There is a possibility of choosing a combination of schemes like a VAT annual accounting scheme with a flat rate scheme.
Moreover, if you do not submit the VAT returns frequently in a year, you are still required to clear VAT payments regularly with HMRC. In case you are in the first year of VAT registration, the amount will be decided through an estimate. However, if you are not in the first year, the amount will be decided according to the VAT return bill of the previous year.
3- Cash Accounting VAT Scheme
This cash accounting VAT scheme is not considered different from the standard VAT scheme. It is just an alternative method to calculate VAT. In case you decide to switch to this alternative method of calculation, there is no requirement of bringing this into the knowledge of HMRC. However, the ability to stay consistent with the chosen method is always suggested.
Moreover, if you choose the method of cash accounting VAT scheme to make your calculations, your calculations will be only done when the invoice of sales is paid as well as the purchase invoices are paid by you.
4- Standard VAT Scheme
People mostly get confused between the terms accrual VAT scheme and standard VAT scheme. However, the accrual VAT scheme refers to the standard scheme is just a simple explanation for this confusion. The prominent feature is that this sets automatically as a default option in case you are a beginner and getting registered with HMRC for the first time. The method to make calculations is very straightforward in this case. Simply the VAT sale invoices are deducted from VAT purchase invoices.
This scheme allows a factor of flexibility by having good control over your cash flow. In case you find out that your purchases are lesser than your sales, some of our sales invoices can be staggered and be part of the following quarter.
The Bottom Line
Now that you have gathered a fair amount of information about ‘choose the right VAT scheme’, we can bring the discussion toward wrapping up. We can sum up by saying that we have listed only the popular VAT schemes considering your small business. However, there are more specialist VAT schemes with other specifications for the relevant industries. If you wish to learn more about the VAT schemes to be more clear to complete your VAT returns, you can simply opt for further professional help to choose the right VAT scheme for your business. We hope these few minutes of reading will allow you to choose the most suitable option for your small business.
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Disclaimer: The information about ‘choose the right VAT scheme’ provided in this blog includes text and graphics of general nature. It does not intend to disregard any of the professional advice.