TXF6 UK
Syllabus F. Value Added Tax F3. The effect of special schemes

F3a. Operation of and advantages of VAT special schemes

Syllabus F3a)

Understand the operation of, and when it will be advantageous to use, the VAT special schemes:
 i) cash accounting scheme.
ii) annual accounting scheme.
iii) flat rate scheme.

Special schemes

These schemes are available to small businesses to reduce the work and amount of VAT payable.

There are 3 schemes:

  1. Cash accounting scheme

  2. Annual accounting scheme

  3. Flat rate scheme

1) Cash accounting scheme

Operation:

  1. The tax point is the date on which the output tax is received and the input tax is paid.

  2. For sales, it is the date that cash is received from customers and for purchases, it is the date that cash is paid to suppliers.

Conditions:

  1. Annual taxable turnover must not exceed £1,350,000.

  2. VAT returns must be kept up to date.

  3. A business must leave the scheme if annual taxable supplies exceeds £1,600,000.

Advantages:

  1. A business will not pay output tax until received from customers. This is a cash flow advantage for the business.

  2. The scheme provides automatic bad debt relief as output VAT will not have been paid on a sale until the cash is received from the customer.

Illustration

Shivani has an annual turnover of £1,200,000. 

All sales are standard rated and are made on credit for 60 days. 

All purchases are standard rated are made on credit for 30 days. 

If Shivani opts into the cash accounting scheme, when will she need to account for VAT for her sales and purchases?

  • Solution

    Shivani will need to account for her standard rated sales 60 days after the sale is made, as this is when the cash is received. 

    This will ensure that Shivani does not pay any output VAT for bad debts. 

    She will need to account for her standard rated purchases 30 days after the purchase is made, as this is when the cash is paid.

2) Annual accounting scheme

Operation:

  1. One VAT return is prepared each year.

  2. The VAT return is due 2 months after the annual accounting VAT period, along with the balancing payment of VAT.

  3. 9 payments of VAT are made from months 4-12 during the annual accounting period. These are (10% * VAT paid last period).

  4. The final payment (2 months after the annual accounting period) is calculated as follows:
     
    (VAT payable for the year – 9 payments made during months 4-12 during the period) = balancing payment.

Conditions:

  1. Annual taxable turnover must not exceed £1,350,000.

  2. VAT returns must be kept up to date.

  3. A business must leave the scheme if annual taxable supplies exceeds £1,600,000.

Advantages:

  1. Administration costs are saved, only one VAT return is prepared per year.

  2. Regular monthly payments help the cash flow of the business, small regular payments are made as opposed to less frequent large outflows.

  3. It simplifies accounting for VAT.

Illustration:

Terry for the year ended 31/12/2018 paid VAT of £10,000.

  • She was eligible to enter the annual accounting scheme and for the year ended 31/12/2018 she had VAT payable of £12,000.

  • What were her payments during the year ended 31/12/2018?
    When did she make these payments?
    What was her balancing payment?
    When did she make this payment?

Solution:

Payments on account:

  • (10% * last year’s VAT paid)
    = (10% * £10,000) = £1,000 each month

  • Payments on account were made from months 4-12 during the year ended 31/12/2018. Therefore, they were made from April to December. This total 9 payments on account.

  • Balancing payment:

  • (VAT payable for the year – payments on account)
    = £12,000 – (£1,000 * 9) 
    = £3,000

  • This payment is made 2 months after the year has ended. Therefore, it is made on 28/02/2019.

3) Flat rate scheme

Operation:

  1. VAT payable is computed by using a flat rate of 16.5%. The flat rate % differs from industry to industry (you will be told the % in the exam)

  2. This % is multiplied by the sales revenue.

  3. The sales revenue used includes VAT, exempt supplies and zero rated supplies.

Note: from 6/4/17 there is a standard % of 16.5% for limited cost traders. This means that, regardless of their industry, if they are deemed to be limited cost traders, then they must use the rate of 16.5% (you will be told if this rate applies in the exam).

Conditions:

  1. Annual taxable sales must not exceed £150,000.

  2. A business must leave the scheme once turnover exceeds £230,000.

Advantages:

  1. Simplicity of scheme

  2. Reduces administration costs

  3. Less detailed records of input and output VAT are needed.

Illustration:

Addi Ltd. has annual sales of £84,000. 

These are standard rated and inclusive of VAT. 

The company also has standard rated expenses of £4,800 (VAT inclusive). 

The flat rate is 16.5%.

  • Is it beneficial for the company to use the flat rate scheme or account for VAT normally?

Solution:

Flat rate scheme:

  • 16.5% * £84,000 = £13,860 payable

  • Normal accounting:

  • Output VAT: 20/120 * £84,000  = £14,000
    Input VAT: 20/120 * £4,800  = (£800)
    Net VAT payable = £13,200

  • It is not beneficial for Addi Ltd. to opt into the flat rate scheme.