HMRC and cash flow: a guide to VAT schemes

If Benjamin Franklin was alive today, I’m sure he would have said, ‘There are three things in life that are certain. Death, taxes and unsolicited PPI claim calls.‘ While there’s not a lot that can be done for two of these, taxes (in particular VAT) needn’t be too much of a headache. In this article I’ll touch on how to register for VAT, what options are available to you, the ways to submit your VAT accounts and what you need to bear in mind to keep on the right side of the taxman.

Registration

Depending on the size of your business, you may not have to register for VAT. However, it may be beneficial to do so, especially if you have high outgoings. In this instance it is possible to make a voluntary registration. However, you are not legally required to do so if your business turns over less than £83,000*.

If you’re not yet registered for VAT you can do so through the Government Gateway; more on that later on. Unless you choose a VAT scheme, you will file returns quarterly. You include any invoices and receipts raised during this time, whether or not they have been paid. This means that you may have to pay VAT on an invoice before the customer has paid you; however, the reverse is true for outstanding purchase receipts. This is a good system for retailers and businesses who get paid on delivery of their goods and services, but can cause cash flow issues if purchases are always paid promptly but customers are slow to pay their invoices. Because HMRC recognises that different business models may have different needs, there are three schemes that you can choose from which can help with cash flow.

Cash Accounting Scheme

Cash accounting is similar to the standard system, in that returns and payments are still made quarterly. However, these are based on invoices and purchases that have been paid. This way you only have to account for actual income and expenditure. The result is that you deal with a more real time revenue situation and are not left out of pocket from bad debt. The turnover cap for this scheme is £1.35m* per annum. If customers are often slow to pay, this scheme can make a big difference to cash flow.

Annual Accounting Scheme

As with the Cash Accounting scheme, this is available to firms with a turnover below £1.35m*. Under this scheme only one return is filed, within two months of the end of the financial year. VAT payments are based on the previous year’s figures (or an estimate is made of the coming year’s total if the business is new). These payments are made monthly over 9 months (from month 4 to month 12 of your financial year) or quarterly (at the end of months 4, 7 and 10). Finally, a balancing payment is made within two months of year end. There are various benefits to this:

  • Monthly payments can ease cash flow;
  • Only one return means less time spent on paperwork;
  • Payments are the same each time save for the balancing payment, making it easier to plan ahead and manage cash flow;
  • If business is going well (or has a seasonal peak) you are free to make additional payments.

Flat Rate Scheme

The Flat Rate scheme is available to smaller companies with a turnover of £150,000* or less. It’s structured to greatly cut down on paperwork for small companies and startups. VAT is paid as a fixed percentage of gross income and VAT on purchases is not recorded on your return (of course, you still have to put it in your accounts, no matter which scheme you’re on!). The exception to this is any single purchase of capital assets costing over £2000. The rate that you pay varies according to industry sector – more information can be found here. Flat rate could be a good option for you if many of your suppliers are overseas or not VAT registered, or if your outgoings are consistently low.

If (for whatever reason) the scheme you choose does not suit you, you can leave at any time. However, you must leave a scheme if you cease to be eligible. Once you leave a scheme you will need to wait twelve months before rejoining, even if you remain eligible.

Submitting Your Assessment

The premise of VAT returns is a very simple one. Ignoring Flat Rate, if you pay more VAT on outgoings (purchases) than you do on income (sales) you will receive a rebate of the difference. The reverse is also true: if you receive more than you spend, you will have to pay the difference to HMRC. If the balance is zero, a VAT assessment still needs to be filed so that the tax office knows that you have not filed for this reason, rather than through error or neglect.

Submitting your returns must be done online, with two exceptions: either you cannot use a computer for religious beliefs, or because of impracticalities such as location or disability that preclude your use of a computer or the Internet. If that’s the case it’s highly unlikely that you’ll be reading this! Regardless, in these cases returns can be filed by post.

Sending a return can be done in one of three ways. All of these will require you to have or create a Government Gateway account. If you do not already have one, you can register here. The process is pretty straightforward and doesn’t take long. You will, however, have to wait for a code to arrive in the post, so register well in advance of your first filing date! Once you are registered you can complete a return using the online form. You can also use accounting software that will do this for you and submit the return automatically. A list of HMRC approved software can be found on this page.

If you don’t have the time or inclination, an agent or an accountant can do your return for you. In this situation you will have to authorise the person or organisation to do this on your behalf.

Keeping Records

With your return completed there are still a number of obligations that you must observe:

  • By law you must keep all your records for six years.
  • You can keep VAT records on paper, electronically or saved on an accountancy software package. Records must be accurate, complete and readable.
  • If you’ve lost a VAT invoice or it is damaged and no longer readable, ask the supplier for a duplicate (marked ‘duplicate’).
  • You must also keep copies of all VAT invoices you issue.
  • Accounts must be kept for all income and outgoings.
  • VAT schemes can be changed so a record of what scheme is in effect in what time period is required too.
  • Do not feed your accountant after midnight.
  • When buying or selling any goods or services in the EU these must be kept on a separate record. If you sell to other EU countries you will need to complete an EC Sales List (ESL).
  • If changes have been made to your account, to either what is owed or due, this must be recorded as well.

That, as they say, is that. If you do find yourself out of your depth or need advice, the HMRC website is a very useful resource. Not only is it full of easily accessible information but there are webinars available, and you can also call them on their helpline. Contrary to popular belief, they are always more than happy to help!

*All the data in this article applies to the 2016-17 financial year.