When do I need to register for VAT? Filing schemes unpacked

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Intro: If you’re running a small enterprise or business, you’re going to face the decision of whether to register. Here, we’re going to unpack all the advantages and disadvantages of the various Value Added Tax (VAT) schemes to help you figure out what to do next. 

Essential turnover amount

Based on a rolling 12-month period, if your annual turnover is above £85,000 then you are required by the UK government to register for VAT. If your business is not making this much, you can still actually choose to register. Many small businesses do this due to some of the advantages of being VAT registered, which we will cover below. Of course, this does mean that you will have some admin to deal with around tax, but the good news is that these days there are plenty of ways to file and pay VAT online.

The three main VAT filing schemes you may choose

While there are a variety of VAT schemes that you may register for, we’re going to focus on the three that most businesses choose. 

The Standard VAT scheme

It’s all in the name for this one. It’s the most simple scheme to register for. In this scheme, the amount of VAT due to HMRC is determined by subtracting the VAT paid on sales invoices from the VAT paid on purchases.

Typically, a business or organisation will prepare their VAT returns on a quarterly basis, however some do prefer to prepare them monthly or annually.

If your clients are quick to pay or if you generally receive fast payments – like in a shop or online – then you may want to use the Standard VAT scheme as you will obtain funds before needing to pay VAT.

Electing for cash accounting 

With this method, you will calculate VAT by subtracting sales invoices income from the VAT that was paid on those invoices during the period in which they were settled. 

You may want to use this scheme if you offer long credit terms or have customers who take a long time to settle invoices. An advantage of this method is that you avoid paying VAT on bad debts. In addition, if the input VAT on your purchases is less than the output VAT on your sales, it may also provide a cashflow advantage.

It is essential that your annual turnover remains below £1.35 million to stay in this scheme.

The Flat Rate VAT scheme

In 2002 a new VAT scheme was introduced to assist small businesses and reduce the mountain of admin they had to deal with. This is the Flat Rate VAT scheme. You are only eligible for this scheme if your turnover is under £150,000 per year and you will need to apply to join. You will also need to withdraw from the scheme if your annual turnover is in excess of £230,000.

The VAT rates are set by HMRC and are based on a defined proportion of sales. There is a tax rate of 16.5% if you spend less than 2% of your yearly turnover or £1,000 per year on products or services. A benefit with this scheme is that in your first year of trade you can get a 1% discount.

If you’re a freelancer – such as contractors – the Flat Rate scheme may be right for you as someone who doesn’t buy many goods or services that are subject to normal rate VAT goods or services.

The benefits and drawbacks of VAT registration

Starting with the negatives, it’s a fact that being VAT registered will increase your paperwork and add some admin hassles for your business. Additionally, if you’re working with non-registered traders or VAT-exempt traders, it’s possible you will need to increase the price of your product or services. 

On the positive side, you could be looking at a healthy tax refund as VAT on purchases can be reclaimed. It also helps your business look more established and professional, building trust with your potential customers.

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