There are three main ways to account for VAT:
- Quarterly accounting.
- Cash accounting.
- Annual accounting.
Using annual VAT accounting, you make nine monthly or three quarterly interim payments throughout the year. Here, regular payments are made on account as agreed. You pay monthly or quarterly installments towards an annual VAT bill. This evens out VAT payments and helps smooth cash flow. At the end of the year you submit a single annual return and any balance due thus reducing administration and manage your business cash flow more predictable & easy
You can use annual accounting if your estimated turnover during the next tax year is not more than £1.35 million. If you are already using annual accounting you can continue to do so until your estimated turnover exceeds £1.6 million.
The advantages of this scheme include:
- Payments are spread.
- Easier cash flow forecasting.
- You get an extra month to submit your VAT return, and only need to complete one a year.
To join the annual accounting scheme, you must fill out an application form. You can join the annual accounting scheme using the form VAT 600 AA to apply for joining the annual accounting scheme.
If you use this scheme, you account for VAT on the basis of payments you receive and make, rather than on invoices you issue and receive. This means you don't pay us VAT until your customers pay you. Registered traders whose turnover is not expected to exceed a particular threshold in the following 12 months may use the cash accounting scheme.
You can obtain this accounting system at the beginning of a tax period & can apply to the entire business.
Cash accounting can enhance your cash flow if your customers are slow payers. If, however, your customers pay promptly, you would probably be worse off under cash accounting because of the loss of input tax on unpaid creditors. If a customer never pays you, you don't have to pay VAT on that bad debt as long as you continue to use the cash accounting scheme.
You can use cash accounting if your estimated turnover during the next tax year is not more than £1.35 million. You can, continue to use cash accounting until your estimated turnover exceeds £1.6 million.
You cannot use cash accounting:
- For the sale of goods or services invoiced in advance of the supply being made.
- Payment for sales is not due for more than six months after the invoice date.
- You are not up-to-date on your VAT returns and VAT payments
- You have been convicted of a VAT offence or charged a penalty for VAT evasion in the last year.
- Your turnover is over £1.35m per year
- Once your turnover exceeds the threshold, you are usually able to continue in the scheme until you reach the 25% tolerance limit. You must account for all outstanding tax in the period in which you leave the scheme.
You account for VAT quarterly based on the invoices issued and received in the period. You pay all VAT due, whether or not your clients have paid the invoices that incurred it.
Usually VAT bad debt relief is not available until the debt is six months old. However, under the cash accounting system explained below, the problem of VAT on bad debts disappears.
Besides there are also other systems :-
Flat rate scheme
Flat Rate Scheme contains its own cash-based turnover method. If your VAT taxable turnover is less than £150,000, you could simplify your VAT accounting by calculating your VAT payments as a percentage of your total VAT inclusive turnover. The percentages are decided according to the trade sector your business is in. Under the scheme you won't be able to reclaim any of the VAT you pay, as this is taken into consideration as part of the percentage calculation.
If you register for the Flat Rate Scheme in your first year of VAT registration, you can take advantage of a one per cent reduction in your flat rate percentage.
Once you join the scheme you can stay in it until your total business income is more than £225,000.
If you are a retailer & sell direct to the public you may find it difficult to issue a VAT invoice for each sale & account for vat . But there are several schemes where you can simplify your calculation of VAT by not having to account for VAT on each individual sale.
But with the VAT retail schemes, you work out the value of your total taxable sales for a period - for example, a day - and the proportions of that total that are taxable at different rates of VAT according to the scheme you are using. You then apply the appropriate VAT fraction to that sales figure to calculate your VAT due.
The benefits of using this scheme is that you do not need to record VAT separately in your accounts for each and every retail sale you make. This is particularly beneficial if you make a number of low value and/or small quantity sales to the general public. This can save you a lot of time and record keeping