A business may join the scheme when it registers for VAT based on an estimate of turnover, provided it has reason for believing its taxable supplies will be below £1,350,000 per annum.
A business that is already registered for VAT can join providing the taxable turnover limit does not exceed £1,350,000 per annum.
A business must cease using the Scheme if its taxable turnover exceeded £1,600,000 per annum in the previous accounting year. The business has to complete a Form VAT 600AA to apply to join the scheme and can also use the Flat Rate Scheme at the same time.
A business is not allowed to join the scheme if it owes a significant debt to HMRC but they will not necessarily refuse the use of it if the business only owes a small amount.
How Does it Work?
The business makes nine monthly payments of 10% of the total paid in the previous year with a balancing payment in month ten or, if newly registered, the amount it is expecting to pay in the next 12 months.
Alternatively, it can choose to pay 25% quarterly. If the interim payments have been set too high or too low because the trading pattern has altered, HMRC may agree to change them.
Payments start on the last working day of the fourth month of the scheme’s accounting year. They must be by standing order, direct debit or other electronic means but not by cheque.
The business submits its annual VAT return, together with any balance due to HMRC, two months from the end of the scheme’s accounting year i.e. a business gets an extra month over the time limit applicable to a normal VAT return.
A careful choice of the scheme year may help. If the busiest trading is in the summer, a scheme year ending, say, 31 January, spreads the payments, thus assisting cash flow. It is also convenient to produce both the annual VAT return and the annual accounts at a quieter time of the year.
What are the Advantages?
A business can manage its cashflow better by paying a fixed amount in monthly or quarterly instalments so you know when you have to pay and how much. You can make additional payments as and when you wish if you think your balancing payment is likely to be larger than expected.
What are the Disadvantages?
If you regularly reclaim VAT, you will only get one repayment per year so this could damage your cashflow, so you would be best staying with the normal accounting system.
If your turnover decreases, your interim payments may be higher than your VAT payments would be under the standard VAT accounting – unless you apply to HMRC to have your interim payments reduced.
Professional accountants tend not to like the scheme much because they think that the discipline of preparing a quarterly VAT return helps clients to keep their records up to date. Without this some business forget about their record keeping until the end of the year when they can find themselves under pressure to complete the return on time and can’t even find the records to complete the return.
By Andrew Needham