Clients could benefit from considering these special schemes.
As the Making Tax Digital (MTD) for VAT April 2019 date looms large (coupled with delays to HMRC's digital projects) it is worthwhile looking at VAT special schemes and discussing them with clients.
A number of special schemes are available to VAT registered businesses, which, subject to meeting the conditions, businesses can choose to use if they so decide. These include the following:
cash accounting scheme
annual accounting scheme
flat rate scheme for small businesses
flat rate scheme for farmers
tour operators’ margin scheme.
Let’s take a closer look at how we account for VAT under each of these.
Cash accounting scheme
If a business is already registered for VAT and eligible to use this scheme, then this scheme may be used from the start of the next VAT period. There is no need to apply to use the scheme. Output tax must be accounted for in the return for the VAT period in which payment or other consideration is received.
Input tax can be reclaimed in the return for the VAT period in which payment is made or other consideration is given or in a later period as may be agreed with HMRC.
Subject to some exceptions, where the cash accounting scheme is used, it must be used for the whole of the VAT registered business. The exemptions include goods bought on hire purchase or lease purchase and some other items.
The amounts of VAT due and VAT deductible are based on payments received and made, not on invoices issued. Similarly, the boxes for values of output and inputs must be completed on the basis of payments received and made (exclusive of VAT). Subject to specific conditions, the scheme is available if taxable supplies will be no more than £1,350,000 in the next year. The entity will need to leave the scheme if its taxable sales (excluding VAT) exceed £1,600,000 for the year.
The Annual Accounting Scheme allows you to complete just one VAT return each year, instead of four. VAT is paid by instalments, either three quarterly instalments or nine monthly instalments. These must be paid by direct debit, standing order or other electronic means. After joining the scheme, HMRC calculates and notifies the business of the instalment amounts and the dates they are due. The business can pay additional voluntary payments.
At the end of the year the business submits its VAT return and any balance outstanding. If too much money has been paid throughout the year, HMRC will refund the excess. The due date for annual returns is normally two months after the end of the annual accounting year. Both the dates for the start and end of the VAT period and the due dates will be shown on the VAT return.
The eligibility conditions are similar to the ‘cash accounting scheme’ in that the scheme is available if taxable supplies will be no more than £1,350,000 in the next year. The entity will need to leave the scheme if its taxable sales (excluding VAT) exceed £1,600,000 for the year.
The scheme allows a business to apply a fixed flat-rate percentage to the gross turnover to arrive at the VAT due. Fixed-rate percentages vary depending on the type of business.
Subject to certain conditions, the scheme is for businesses with turnover of no more than £150,000 a year, excluding VAT. The business will cease to be eligible to use the scheme if the total value of income for the year ending is more than £230,000.
Farmers who are certified under the flat-rate scheme do not account for VAT, or submit returns, on sales of goods and services within the designated activities to other VAT-registered customers. This means that they cannot reclaim the related input tax.
However, on sales of designated goods and services to VAT-registered persons, farmers may charge a fixed flat-rate addition of 4% on top of the sales price. This also applies if some of the goods would otherwise be zero-rated. The farmer would retain the 4% addition and the VAT–registered person is able to recover it as if it were VAT.
The flat-rate addition is not charged on sales of goods and services which are not designated (eg machinery sales) or on sales to non-registered persons (eg the general public or other flat-rate farmers).
If the taxable turnover of non-farming activities is less than the VAT registration threshold, a farmer can still be a flat-rate farmer. He would not charge VAT or the flat-rate addition on the non-farming activities. Common examples of non-farming activities include ‘bed and breakfast’ and ‘provision of storage facilities’.
If the taxable turnover of non-farming activities is above the VAT threshold, a farmer must register for VAT. If that farmer is already in the flat-rate scheme for farmers he should arrange for that certificate to be cancelled and register for VAT. The farmer will not be eligible to join the flat-rate scheme unless:
the non-farming activities are zero-rated, in which case the farmer may ask for exemption from registration and join the scheme; or
the non-farming business is run as a separate business by a different legal entity (eg a person could run his farming activities as a sole proprietor and a bed and breakfast business in partnership with another person).
The scheme is available to farmers and others involved in agriculture, a full definition can be found in VAT Notice 700/46
These schemes are intended for businesses who cannot reasonably be expected to account for VAT in the normal way. For businesses in the scheme there is no requirement to issue a tax invoice to customers. The scheme is often used by supermarkets and other shops with a large number of customers.
There is no upper limit to the value of sales a business can have and be eligible to use the scheme. Although if annual VAT exclusive turnover exceeds £130,000,000 then a bespoke scheme will need to be agreed with the local VAT Business Advice Centre, whereas if turnover is less than this amount then one of the standard schemes can be used.
The margin scheme can be used for the supplies of second-hand goods, works of art, antiques and collectors’ items. Using the margin scheme allows the entity to account for VAT on the difference between the price paid for an item and the price it was sold for. Without the scheme VAT would be accounted for on the full selling price and there may not have been any VAT on the purchase of the item.
The trader has the choice of using the margin scheme or accounting for VAT in the normal way. If some sales come within the margin scheme and some do not then the margin scheme can be used for some sales and the normal rules for others. VAT can be reclaimed on business overheads as usual (such as accountancy fees, repairs, stationery etc.).
Sales invoices should show the total price including VAT at the standard rate, although the invoice must not show VAT as a separate item.
As an intermediary, the value of the supply on which VAT may be due will be the amount of commission due from the principal or the fee charged (excluding VAT).
Input tax incurred by the intermediary in general would be reclaimed in the normal way.
Complications can arise on issues such as determining the place of supply of the services, also whether the travel agent is acting as an intermediary, an agent acting in own name or as principal. These matters are dealt with in VAT Notice 709/6.