In the dynamic landscape of taxation, understanding Value Added Tax (VAT) schemes is crucial for businesses operating in the United Kingdom. VAT schemes offer various options tailored to different business needs, helping them manage their VAT obligations efficiently while potentially saving time and money. In this blog post, we will delve into the intricacies of UK VAT schemes and rates.
What is VAT?
Value Added Tax (VAT) is a consumption tax levied on goods and services at each stage of production or distribution. It is ultimately borne by the end consumer, making it an indirect tax. VAT is a significant source of revenue for the UK government, and businesses are required to register for VAT if their taxable turnover exceeds the threshold set by HM Revenue & Customs (HMRC).
When to register?
The VAT registration threshold determines whether a business needs to register for VAT, and the current VAT registration limit in the UK is £90,000.
- If your business’s total VAT taxable turnover exceeded £90,000 within the last 12 months by the end of any month, it’s mandatory to register for VAT. Registration must occur within 30 days from the end of the month in which you surpassed the threshold. Your registration’s effective date will be the first day of the second month following the threshold breach.
- You must register if you realize that your annual total VAT taxable turnover is going to go over the £90,000 threshold in the next 30 days. You have to register by the end of those 30 days. Your effective date of registration is the date you realized, not the date your turnover went over the threshold.
What are Schemes?
# Standard VAT Scheme:
- The standard VAT scheme is the default option for VAT-registered businesses with a turnover above the VAT threshold.
- Under the standard scheme, businesses register for VAT with HMRC and charge VAT on their taxable supplies at the standard rate (20%). They then report and pay the VAT to HMRC regularly, usually quarterly or annually.
# Flat Rate Scheme:
- If your business falls under the category of small enterprises with an annual taxable turnover of £150,000 or less, excluding VAT, you’re eligible to utilize this scheme.
- In this scheme, you pay a fixed rate of VAT to HMRC.
- The difference between what you charge your customer and pay to HMRC is your Gain.
- In this scheme, you can’t reclaim the input VAT (VAT on purchase) except for capital assets purchases over £2000.
# Annual Accounting Scheme:
- The Annual Accounting Scheme allows businesses to submit VAT returns annually instead of quarterly.
- Businesses make advance payments towards their VAT bill based on their estimated turnover for the year.
# Cash Accounting Scheme:
- Pay VAT on your sales when your customers pay you.
- This can be beneficial for managing cash flow, especially for businesses with late-paying customers.
- To join the scheme your VAT taxable turnover must be £1.35 million or less.
# VAT Margin Scheme:
- The VAT Margin Scheme applies to businesses that sell second-hand goods, antiques, or works of art.
- VAT is calculated only on the difference between the selling price and the purchase price (margin), rather than the full selling price.
- This scheme is advantageous for businesses dealing in items with low profit margins.
What are the rates?
- Standard rate: This is the most common rate, sitting at 20% for most goods and services.
- Reduced rate: Certain items like domestic fuel and some health products benefit from a lower rate of 5%.
- Zero-rated: Everyday essentials like most food, children’s clothing, and books are generally zero-rated, meaning no VAT is applied,
There’s also a category of exempt goods and services where VAT doesn’t apply at all, such as postage stamps and financial transactions. For more, refer HMRC site.
What are the deadlines?
Generally, VAT returns and payments are typically due one calendar month and seven days after the end of the VAT return period. For example, if the VAT return period ends on March 31st, the deadline for filing and payment would be May 7th.
If a business is on the Annual Accounting Scheme, the deadline for filing the annual VAT return and making any payment due is two calendar months and seven days after the end of the accounting year.
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