Chapter 5: VAT Accounting Schemes

Question 1

What is a return period?

Answer 1

A return period is the three months before a VAT return is due, covering the quarter that needs to be reported on.

Question 2

What is Making Tax Digital (MTD)?

Answer 2

Making tax digital requires VAT-registered businesses to keep digital records and submit VAT returns online

Question 3

What are the three rules than allow a business to be exempt from MTD?

Answer 3

1. Not practicable due to age, disability or remote location
2. Facing legal action due to being unable to pay its debts (insolvency proceedings)
3. Religious beliefs prevent the use of software

Question 4

How does a business comply with MTD?

Answer 4

• using compatible software to keep digital records and submit VAT returns

OR

• using bridging software to connect spreadsheets to HMRC’s system (API)

Question 5

Complete the sentences regarding payment of VAT.

1. VAT must be paid _______ and cleared by the _______ date.
2. The additional seven days for VAT payments do not apply for _____ businesses, which instead are required ______ payments.
3. If HMRC owe a businesses, it is usually repaid within ___ days of receiving the return.
4. Businesses that solely make ____-______ supplies, can opt for __________ returns to improve ____ ____.

Answer 5

1. VAT must be paid electronically and cleared by the submission date.
2. The additional seven days for VAT payments do not apply for large businesses, which instead are required to make monthly payments.
3. If HMRC owe a businesses, it is usually repaid within 30 days of receiving the return.
4. Businesses that solely make zero-rated supplies, can opt for monthly returns to improve cash flow.

Question 6

What is the aim of the Annual Accounting Scheme?

Answer 6

To reduce the administration burden for smaller businesses by requiring only one VAT return per year and regular payments to ease cash flow

Question 7

What are the advantages and disadvantages of the Annual Accounting Scheme?

Answer 7

Advantages:
- Reduces administration
- Two months to complete the annual VAT return instead of one
- Regular fixed payments help budgeting
- Flexible payment options

Disadvantages:
- Not useful for zero-rated traders
- Businesses with declining turnover will be at a disadvantage, as the regular payments are based on last year’s higher liability

Question 8

What is the difference in tax points under the cash accounting scheme?

Answer 8

Under cash accounting, the tax point is the date payment is received from customers (for output tax) or the date payment is made to suppliers (for input tax), instead of the invoice date.

Question 9

What is the aim of the Flat Rate Scheme?

Answer 9

To simplify the way a business calculates VAT liability, as input tax is not reclaimed, and does not have to be recorded or entered on the VAT return.

Question 10

How does the flat rate scheme work?

Answer 10

• Businesses must still issue tax invoices and maintain a VAT account.
• HMRC assigns a flat rate percentage based on the type of trade.
• VAT payable = flat rate percentage × total VAT-inclusive turnover (includes taxable and exempt supplies, but not capital items).

Question 11

What are the advantages and disadvantages of the Flat Rate Scheme?

Answer 11

Advantages:
- Simplified VAT returns
- Less risk of mistakes
- Easier administration
- Potential to pay less VAT than using the standard scheme
- Can be used with the annual accounting scheme

Disadvantages:
- Not suitable for businesses that would normally receive VAT repayments.
- Not suitable for businesses with higher amounts of zero-rated or exempt sales

Question 12

What is a limited cost business?

Answer 12

A limited cost business is a business that spends very little on physical goods.

HMRC has special rules for these businesses under the flat rate scheme to prevent them from benefiting unfairly.