Indirect tax: VAT special schemes The details of special VAT schemes are often tested in the indirect tax computer based assessment (CBA). Calculations are not usually required; the questions will be to test your knowledge on each particular scheme. However, some examples are shown below to aid your understanding of this topic. We will start by looking at the normal rules for VAT registered businesses that do not operate under a special VAT scheme: The normal rules Under the normal VAT rules businesses will pay VAT charged on standard-rated sales to Her Majesty s Revenue and Customs (HMRC) on a quarterly basis, regardless of whether the customer has paid. Input VAT can be reclaimed on goods and services purchased in the same period, even if payment has not yet been made. For example, below are extracts from the day books of a business for the quarter ended 31 August 201. Net ( ) VAT ( ) Gross ( ) Sales day book 200,000 40,000 240,000 Purchases day book 56,000 11,200 67,200 Calculate the VAT payable to HMRC for the quarter. The VAT payable to HMRC will be 28,800 ( 40,000-11,200). The due date for payment and submission of the VAT return is one month after the end of the VAT period. This will be 30 September 201 for the quarter ended 31 August 201.This is extended by a further seven days if the return is submitted online and the payment made electronically. So, a VAT return for the period ending 31 August must be submitted online by 7 October and any VAT due to HMRC must be paid electronically by 7 October. Under the normal rules VAT on bad debts can only be reclaimed once the debt is over six months old and provided it has been written off in the accounts. Special VAT schemes There are three schemes that may be tested in the assessment. These are the cash accounting scheme, the annual accounting scheme and the flat rate scheme.
The cash accounting scheme Businesses are eligible to use this scheme if their estimated future taxable turnover (standard and zero-rated sales) doesn t exceed 1.35m per annum. The scheme can be used until the taxable turnover exceeds 1.6m per annum. Under the cash accounting scheme businesses will account for output VAT when amounts are received from customers. Input VAT can be reclaimed on goods and services purchased once payment has been made. For example, in the quarter ended 31 December 201 a business received 300,000 (including VAT) from its customers and paid 78,000 (including VAT) to its suppliers. Calculate the VAT payable to HMRC for the quarter. The VAT payable to HMRC will be 37,000 (( 300,000 x ⅙) - ( 78,000 x ⅙)). The due date for payment and submission of the VAT return is the same as under the normal rules. Under this scheme there is no need for any adjustment for bad debts as the VAT will never have been paid. The annual accounting scheme Businesses are eligible to use this scheme if their estimated future taxable turnover (standard- and zero-rated sales) doesn t exceed 1.35m per annum. The scheme can be used until the taxable turnover exceeds 1.6m per annum. Under the annual accounting scheme one VAT return is completed each year, rather than the usual four. Payments to HMRC are made in instalments, based on the previous year s liability. Once the annual return is completed a balancing payment is made or a balancing refund received. For example, a business has submitted its VAT return under the annual accounting scheme. The total VAT due is 110,000 and instalments of 90,000 have been made during the year. Calculate the balancing payment due for the year. The balancing payment is 20,000 ( 110,000-90,000). The due date for payment of any balance and submission of the VAT return is two months after the year end date and must be done online. The flat rate scheme Businesses are eligible to use this scheme if their taxable turnover is less than 150,000 per annum. The scheme can be used until the taxable turnover reaches 230,000 per annum.
Under the flat rate scheme VAT is paid at a fixed percentage of the total turnover (including VAT) of a business. This will include zero-rated and exempt sales. For example, a business has total sales for a quarter of 13,000 (including VAT). The flat rate percentage is 8%. Calculate the VAT payable for the quarter. The VAT payable will be 1,040 ( 13,000 x 8%) The percentage will vary depending on the type of work the business carries on. There will be no claim for input VAT, unless it relates to non-current assets over 2,000 (including VAT). The due date for payment and submission of the VAT return is the same as under the normal rules. Let s have a look at some examples of the differences in the flat rate scheme compared to the normal scheme: Businesses A and B operate under the normal rules for VAT. Extracts from the day books for the quarter ended 30 September 202 are as follows. Business A Net ( ) VAT ( ) Gross ( ) Sales day book 35,000 7,000 42,000 Purchases day book 10,000 2,000 12,000 Business B Net ( ) VAT ( ) Gross ( ) Sales day book 28,000 5,600 33,600 Purchases day book 15,000 3,000 18,000 If the businesses were registered under the flat rate scheme the flat rate percentage would be 10%. Calculate the VAT payable to HMRC for the quarter for each business under the normal rules. A The VAT payable to HMRC will be 5,000 ( 7,000-2,000). B The VAT payable to HMRC will be 2,600 ( 5,600-3,000). Calculate the VAT payable to HMRC for the quarter for each business under the flat rate scheme. A The VAT payable to HMRC will be 4,200 ( 42,000 x 10%). B The VAT payable to HMRC will be 3,360 ( 33,600 x 10%).
Would either of the businesses be better off by registering under the flat rate scheme? Yes business A would be better off, the amount payable under the flat rate scheme is lower ( 4,200) than the normal rules ( 5,000). Business B would not be better off as the amount payable under the flat rate scheme is higher ( 3,360) than the normal rules ( 2,600). Business C makes a mixture of standard-rated, zero-rated and exempt sales. Extracts from the sales day book for the quarter ended 30 September 202 are as follows. Business A Net ( ) VAT ( ) Gross ( ) Standard-rated 10,000 2,000 12,000 Zero-rated 5,000 0 5,000 Exempt 18,000 0 18,000 33,000 2,000 35,000 If the businesses were registered under the flat rate scheme the flat rate percentage would be 10%. Calculate the VAT payable to HMRC for the quarter for Business C under the normal rules and the flat rate scheme. Normal rules The VAT payable to HMRC will be 2,000 (less any input VAT, which is reclaimable). Flat rate scheme The VAT payable to HMRC will be 3,500 ( 35,000 x 10%). Under the flat rate scheme VAT is paid at a fixed percentage of the total turnover (including VAT) of a business. This will include zero-rated and exempt sales. No deduction is given for input VAT. Finally, let s test your knowledge. For each of the lines below, tick the relevant scheme(s). Four VAT returns are submitted each year Input VAT can be reclaimed on all goods and services Payments to HMRC are in instalments and based on the previous year s liability The VAT paid to HMRC is calculated as a percentage Flat rate scheme Cash accounting scheme Annual accounting scheme
of the VAT inclusive turnover Turnover must be less than 150,000 per annum to join the scheme A business must leave the scheme if turnover exceeds 1.6m