0800 140 4644
Value Added Tax (VAT) is a crucial part of running a business in the UK, but choosing the right VAT scheme can be confusing. The scheme you select can impact your cash flow, admin workload, and even how much VAT you pay.
At Black & White Accounting, we make VAT simple, stress-free, and tailored to your business needs. Whether you’re a small startup, freelancer, or growing enterprise, here’s your ultimate guide to VAT schemes, why they exist, and how to choose the best one for you.
A Brief History of VAT in the UK
VAT was introduced in the UK in 1973, replacing Purchase Tax. It was designed to be a fairer, consumption-based tax on goods and services. Today, VAT is one of HMRC’s biggest revenue streams, contributing billions to public services.
Since its introduction, different VAT schemes have been developed to help businesses manage their VAT obligations efficiently, particularly smaller businesses that may struggle with administrative burdens.
What is VAT and Why Does It Exist?
VAT is a consumption tax that businesses collect on behalf of HMRC. If you are VAT-registered, you must charge VAT on sales, but you can also reclaim VAT on eligible business expenses.
📌 VAT Registration Threshold (2024/25): £90,000 📌 Standard VAT Rate: 20% 📌 Reduced VAT Rate: 5% (e.g., home energy, children’s car seats) 📌 Zero-Rated Goods: 0% (e.g., most food, books, children’s clothing)
Which VAT Scheme is Best for You?
There are several VAT schemes, each designed to suit different types of businesses. Here’s a breakdown of the most common ones:
1. Standard VAT Accounting Scheme (The Default Option)
✅ Suitable for most businesses with VAT registration. ✅ You charge VAT on sales and reclaim VAT on expenses. ✅ VAT returns must be submitted quarterly. ✅ You must pay VAT to HMRC even if invoices haven’t been paid yet. 📌 Best for: Businesses with stable cash flow that can manage regular VAT payments.
2. Flat Rate VAT Scheme (FRS) – Simplify Your VAT
✅ Designed for small businesses with turnover up to £150,000. ✅ Instead of reclaiming VAT on purchases, you pay a fixed percentage of turnover. ✅ The percentage varies by industry (e.g., IT consultants pay 14.5%, restaurants pay 12.5%). ✅ First-year discount: 1% reduction in the VAT rate for new VAT-registered businesses. 📌 Best for: Businesses with low expenses, service-based industries, and freelancers who want simpler VAT reporting.
3. Cash Accounting VAT Scheme – Improve Your Cash Flow
✅ You only pay VAT to HMRC when you receive payments from customers (instead of when you issue invoices). ✅ Helps with cash flow, especially if customers take time to pay. ✅ Must have an annual turnover below £1.35 million to join. 📌 Best for: Businesses that experience late payments or want to improve cash flow.
4. Annual Accounting VAT Scheme – Reduce Admin Burden
✅ Instead of quarterly VAT returns, you submit one return per year. ✅ Make monthly or quarterly VAT payments, then submit a final balance payment. ✅ Helps spread VAT payments evenly throughout the year. ✅ Only available to businesses with turnover below £1.35 million. 📌 Best for: Businesses that prefer predictable VAT payments and less frequent admin.
5. VAT Margin Scheme – Ideal for Second-Hand Goods
✅ Used for second-hand goods, antiques, and works of art. ✅ You only pay VAT on the profit margin (not the full selling price). ✅ Simplifies VAT for businesses dealing in reselling items. 📌 Best for: Second-hand retailers, car dealerships, art dealers.
6. Retail VAT Schemes – Perfect for Shops
✅ Designed for retailers who sell a high volume of low-value goods. ✅ Different methods available:
- Point of Sale Scheme: Calculate VAT at the point of sale.
- Apportionment Scheme: Used when buying stock with different VAT rates.
- Direct Calculation Scheme: Calculate VAT based on sales records. 📌 Best for: Retail businesses needing efficient VAT tracking.
7. VAT Reverse Charge Scheme – For the Construction Industry
✅ Applies to VAT-registered businesses in the construction industry. ✅ The customer (not the supplier) pays the VAT directly to HMRC. ✅ Affects contractors and subcontractors under the Construction Industry Scheme (CIS). 📌 Best for: Businesses operating in construction and building services.
Making Tax Digital (MTD) and VAT
In 2019, the UK government introduced Making Tax Digital (MTD), requiring VAT-registered businesses to keep digital records and submit VAT returns through MTD-compatible software. This was designed to reduce errors and streamline tax administration.
✅ MTD is mandatory for all VAT-registered businesses. ✅ Businesses must use approved accounting software like Xero, QuickBooks, and FreeAgent. ✅ Manual record-keeping and paper VAT returns are no longer compliant with MTD.
If you’re unsure about how to switch to MTD-compliant bookkeeping software, Black & White Accounting can help you get set up!
Which VAT Scheme Should You Choose?
The best VAT scheme depends on: 🔹 Turnover – Some schemes are limited to businesses below a certain threshold. 🔹 Industry – Some industries benefit from specific schemes (e.g., second-hand goods, construction). 🔹 Cash Flow Needs – If cash flow is a concern, Cash Accounting or Flat Rate may be beneficial. 🔹 Admin Preferences – If you want less frequent reporting, Annual Accounting may be ideal.
Still unsure? Black & White Accounting can help assess your business structure, cash flow, and industry needs to find the perfect VAT scheme for you!
How Black & White Accounting Can Help
VAT can be complex, but we make it easy. Here’s how we help: ✔️ Assess the Best VAT Scheme for You – Tailored advice based on your business needs. ✔️ VAT Registration & Compliance – Ensuring you’re set up correctly and compliantly. ✔️ Filing VAT Returns & Keeping You on Track – Avoid penalties and stay compliant. ✔️ Optimising Cash Flow & VAT Planning – Making VAT work for your business. ✔️ Optimising Cash Flow & VAT Planning – Making VAT work for your business. ✔️ Book keeping Software – delivering the most efficienty and effective solution for you ✔️ Handling HMRC Queries – If HMRC questions your VAT scheme, we’ve got your back!
Get the Right VAT Scheme for Your Business!
Choosing the right VAT scheme can save you time, money, and hassle. Don’t let VAT be a burden—let Black & White Accounting handle it while you focus on growing your business.
📞 Get in touch today and let’s find the best VAT scheme for you!
