Chapter 5: Accounting Schemes

• Must apply for the scheme 
• Return periods are usually 3 Months
• Electronically must arrive with HMRC with 1 month & 7 days with return period
• Extra 7 days does not apply: 
  • Traders using the annual accounting scheme  or making monthly payments
    
• HMRC take DD payments 3 working days after extra 7 day period 

Making Tax Digital (MTD) DOES NOT apply:

• if businesses are Exempt (not practical, subject to insolvency procedures,  religious beliefs)
• if the business Deregisters for VAT

Postal payments 

• Are rare
• Payment is due at the same time as the return 
• Must have cleared HMRC's bank account 1 month after end of return period

Remember rule 20/120 to work out VAT-Inclusive

• Annual return must be filed within 2 months of end of annual return period 
• 9 payments, made at the end of months 4 - 12 
  • Useful for budgeting cash flow
• Each payment is 10% of the VAT liability for the previous year
• No 7 day Extension
• Useful to reduce adminitration - 1 VAT Return instead of 4 
• Not Useful if:
  • business receives repayments, as they will only receive one payment per year
  • taxable turnover of business is decreasing 

Conditions to join:

• Taxable turn over in the next 12 months is no more than £1,350,000
• Businesses Pre-registered VAT must be up to date with their VAT Returns 
• Businesses must leave the scheme if their estimated taxable turn over for the next 12 months is £1,600,000
• If a business takes over another business as a going concern and if they meet the £1,600,000 threshold  as a new combined business, they should leave the scheme immediately

• The tax point becomes the date of receipt/payment
• Key record  that must be kept is the Cash Book - should summarise all payments made and received, and should have a seperate column for VAT

Conditions

• VAT Returns must be up to date 
• Have no convictions  for VAT offence or penalties for dishonest conduct
• Estimated taxable turnover must not exceed £1,350,000 for the next year 
• If taxable turnover exceeds £1,600,000, trader must leave the scheme 
• If a business takes over another business as a going concern and the estimated taxable turnover meets the £1,600,000 threshold, the new combined business should leave the scheme immediately
• When a business leaves the scheme it must account for all oustanding VAT, as it will be moving to a system where VAT is accounted for on invoices not on a cash basis

Advantages

• Businesses selling on credit do not have to pay out VAT to HMRC until they have receive cash from customers 
  
• Automatic relief for bad debts, because if the customer does not pay,then the VAT on their invoice does not have to be paid over to HMRC - Cash Flow is improved 
• Can be used together with Annual Accounting 

Disadvantages

• Input tax cannot be claimed until the invoice is paid - delays recovery 
• Not Suitable for businesses with a lot of cash sales/zero-rated supplies
• Cash accounting causes a delay in recovery of input tax 
• If used as soon as business registers, it will be unable to reclaim VAT on their stock and assets until the invoices for these items are paid for

• Calculated by applying a flat rate % to its total VAT inclusive turnover
• Includes standard rated, zero rated and exempt supplies 
• No Input VAT is recovered unless there is an excess of £2,000 spent on a capital item (VAT Inclusive) - Input VAT can be recovered by adding it to Box 4 on the VAT Return
  
• If a business in its first year of VAT registration they get a 1% discount on the normal % relevant for its trade/industry sector
• If the business changes business sector it must change flat rate % that is appropriate for its new sector 
• VAT account must  still be maintained 
• Can be used with the Annual Accounting Scheme

Conditions

• Estimated taxable turnover must not exceed £150,000for the next 12 months 
• Once in scheme, a business can stay until their total VAT inclusive income for the previous 12 months does not exceed £230,000
• If a business takes over another business as a going concern and the total VAT-inclusive turnover meets the £230,000 threshold then the new combined business should leave the scheme