The introduction of Making Tax Digital for VAT in April 2019 has highlighted how many different schemes there are and how the accounting software available hardly catered for many of them – usually because accountants and businesses have hitherto calculated the adjustments necessary and accounted for them manually. Each business must consider which is the most appropriate scheme for their circumstances and consult with their accountant if necessary. You can change schemes – for example you can join a retail scheme at the beginning of a VAT quarter without having to inform HMRC.
If you are unsure or need further clarification, please consult your accountant. Don’t base your business decisions on this documentation.
The available schemes are:
1. Standard Invoice-based Scheme – the usual scheme whereby VAT is accounted for at the various rates, sales invoices produced and purchase invoices accounted for on the date of supply and the VAT calculated based on the accounting entries for sales and purchases within the VAT quarter.
2. Standard Cash-based Scheme – sales and purchases are accounted for in the same way as the invoicing scheme but the VAT due is calculated on the trading income received less trading expenditure paid. This scheme was introduced to help cash flow for smaller businesses. You need to be aware of certain aspects of the scheme –
- Any cash not allocated or for deposits is included in trading income and expenditure and must be taken into account.
- Acquisitions from the EC are outside of the scope of cash accounting and must be treated as though invoice accounting.
- Other imports are not affected as they are normal zero rated.
- There is a six month limit regarding cash in advance.
The majority of accounting software packages have catered for these schemes.
Other schemes not normally catered for well, if at all, are detailed below:
3. Flat rate scheme – designed for businesses with little or no input VAT (i.e. few purchases) and allows the total sales including VAT to be discounted to offset the inputs not being accounted for. Within this there are restrictions and rules which we will detail later in this section. There are two schemes within this heading – Limited Cost Trader scheme where the VAT rate is always 16.5% and the other flat rate schemes where the rate is dependant on the nature of the business.
4. Retail schemes – there are effectively five schemes that will be detailed later –
- Point of sale scheme – where sales are analysed accurately using a till or accounting. Purchases are also accounted for accurately – the same principles as are used as in the invoicing and cash accounting schemes.
- Apportionment scheme 1 – Where sales are not accurately analysed but the purchases for cost of sales are. The VAT for output tax is calculated using the analyses of purchases by VAT code. There is an annual adjustment to be made to level out any fluctuations across the year.
- Apportionment scheme 2 – Where sales are not accurately analysed but Expected Selling Prices of purchases are maintained. The sales VAT is calculated using the purchases of each of the VAT rates for the year to date + the previous three months. You must also account for your opening stock.
- Direct Calculation scheme 1 – You first need to determine the levels of sales of the different VAT rates. The lower percentage are your ‘Minority Goods‘. You need then to establish the expected selling prices of these purchases to use as the basis for calculating your VAT liability.
- Direct Calculation scheme 2 – The same principles apply to this scheme as to the Direct Calculation scheme 1 but in addition opening and closing stock values are taken into account.
5. Annual scheme – this scheme can apply to either the Invoicing or Cash accounting schemes and is simply the production of the VAT return for the whole year rather than per quarter. However there are payments on accounts made regularly throughout the year and the balance due or refundable is calculated.
6. Margin scheme – second hand goods, art and collectibles. This scheme allows for VAT to be calculated on the profit (margin) made. Sales and purchases still have to accounted for, but overheads and capital expenditure are treated separately.
7. Group scheme – where one or more members of a group have to combine their VAT returns and submit one return on behalf of the whole group.