Which VAT scheme is right for my business and can save me the most cash?
Standard VAT accounting
VAT is accounted for when invoices are issued or received.
Eligibility
All VAT registered businesses.
Pros
- Input VAT can be reclaimed on purchases before you pay your supplier. This is helpful if you have good credit terms.
- If your customers pay you quickly then standard accounting is beneficial.
Cons
- You must pay Output VAT on your sales even if your customer takes a long time to pay.
- If the customer never pays you should be able to reclaim the VAT but this will create a cash flow issue.
Cash accounting scheme
VAT is accounted for when payments are made and received.
Eligibility
Your business needs to be VAT registered and expected taxable turnover for the next 12 months must be £1.35m or less.
Once your annual taxable turnover exceeds £1.6m you must leave the scheme.
Pros
- Output VAT is not payable until customers pay you. This is helpful if customers take a long time to pay or if you have to pay suppliers quickly.
- If a customer doesn’t pay you then you will not have to account for the output VAT.
- If you are an established business with more output VAT than input VAT joining the scheme can help your cash flow.
Cons
- If you are a start-up or in a regular VAT repayment position the scheme is unlikely to benefit you.
- If you have extended payment terms with vendors and customers pay you quickly then you cannot claim back the input VAT until you have paid supplier invoices but you will have to pay the output VAT when you receive customer payments. This could be an issue for e-commerce businesses.
- If you make continuous supplies of services, you can already obtain the benefit of cash accounting by only accounting for VAT when payment is received. Cash accounting therefore is more beneficial to suppliers of goods e.g. hardware.
- Invoices with payment terms of over 6 months are excluded from the scheme.
Annual accounting scheme
VAT payments are spread evenly over the year rather than paid quarterly.
Eligibility
Your business needs to be VAT registered and expected taxable turnover for the next 12 months must be £1.35m or less.
Once your annual taxable turnover exceeds £1.6m you must leave the scheme.
Pros
- You only need to file one VAT return per year so you should save time and money on administration costs.
- Can be used in conjunction with other schemes.
Cons
- If you are a start-up or you regularly claim VAT refunds then the scheme may not benefit you.
- You are required to make quarterly or monthly VAT payments in advance of calculating your final liability, so you may end up paying too much in up front.
Flat rate scheme
VAT is paid on sales at a fixed industry percentage.
Eligibility
Your business needs to be VAT registered and your expected taxable turnover for the next 12 months must be £150,000 or less (excluding VAT).
Pros
- Reduces the need to keep detailed records.
- Simplifies VAT accounting into a single calculation.
Cons
- You cannot recover input VAT on most purchases.
- VAT savings may be minimal depending on your industry flat rate percentage.
VAT is a crucial part of business and can have a significant cash flow impact in the Tech sector.
To simplify the process of calculating and paying VAT, there are several VAT schemes available - primarily introduced to support small businesses. Here’s an overview of the various schemes available to Tech businesses. We have additional resources available that give more detail on each scheme.
Choosing the right VAT scheme for your Tech business: a cash flow advantage
VAT can be a complex issue, especially for tech businesses. However, several VAT schemes can significantly improve your cash flow. This article explored the four main VAT schemes available: standard VAT accounting, cash accounting scheme, annual accounting scheme, and flat rate scheme.
We highlighted the eligibility criteria, pros, and cons of each scheme to help you choose the most suitable option for your tech business.
Remember, selecting the right VAT scheme depends on your specific circumstances, such as turnover, payment terms, and VAT recovery position. For further guidance and a more detailed breakdown of each scheme, explore our additional resources or contact Tech Relief at enquiries@trtaxadvisers.com or call 020 8058 3532.
By choosing the right VAT scheme, you can optimise your cash flow and streamline your VAT accounting, allowing you to focus on growing your tech business.
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