Schemes For Small Businesses Flashcards
Describe the annual accounting scheme
- Scheme enables a business to make VAT returns annually rather than quarterly
- Advantage to small businesses as it will reduce the administrative burden on them for VAT,
- Available to join if turnover (excluding capital supplied) in the next 12 months is expected to be below £1,350,000
- Businesses must leave the scheme one their turnover in the prior 12 months exceeds £1,600,000
Describe what occurs in the annual accounting scheme
- Only 1 return if required — it’s due within 2 months of the year end.
- Business does however have to make 9 payments on account throughout the year.
- The first payment is due at the end of month 4 and then is made monthly after that for the 8 following months.
- Each payment on account is 1/10 of the liability for the prior 12 months.
- A final balancing payment is made then with the return 2 months after the year end.
- Or you can make 4 payments (25% of the previous year’s liability) on months 4, 7, 20, and 14.
When using the annual accounting scheme, a business can also use the…
Cash accounting scheme or the flat rate scheme, not both
Describe the cash accounting scheme
- Usually the VAT is accounted for on an accruals basis, using the tax point (usually the invoice date) to determine when the transaction should be accounted for, rather then when the cash is actually paid or received.
- Cash accounting system allows for a business to make to account for VAY when cash is actually paid/received rather then on an invoice basis.
- Cashflow benefits —> not pay VAT due to HMRC until they have actually received from the customers/.
- Can joint if taxable turnover excluding capital supplies in the next 12 months is expected to be below £1,350,000.
- Also, VAT payments and returns must be up to date and the business must not be convicted of any VAT offence or penalty points.
- The business must leave the scheme once their taxable turnover in the prior 12 months exceed £1,600,000.
- These limits apply to VAT exclusive turnover.
What are the advantages and disadvantages of the cash accounting scheme
Advantages
- If business allows customer long period of credit, the output VAT will be paid over later.
- This is beneficial to small businesses as they will not need to pay over the output VAT to HMRC until it has actually been received from the customers —> big impact on cash availability.
- Automatic bad debt relied, as no output VAT is payable until the cash is received so avoids making later adjustments on the VAT return.
Disadvantages
- If business takes advantage of long credit periods from suppliers it means that input VAT is reclaimed later.
- When the upper limit is reached and the scheme needs to be left, the business will have to change their accounting system, and manage the transition —> costly
What records must a business keep to operate the annual accounting scheme?
- Show the tax point for payments made
- A cash book summarising payments made and received with a separate VAT column
- Invoices issues or received from cash transactions (dated)
Describe the flat rate scheme
- Offers a simplified approach to accounting for VAT and is only available for businesses if taxable turnover (excluding VAT) does not exceed £150,000.
- Applies a fixed rate to turnover, removing the need to account for input/output VAT on every transaction.
- Scheme must be left if total turnover (including VAT) exceeds £230,000.
- VAT returns are done on a quarterly basis but the admin is simplified.
How is the flat rate scheme applied?
- A flat rate % is applied to the total turnover inclusive of VAT.
- Business does not need to take account of input VAT, therefore no need to keep a record of it.
- Ultimate amount of VAT paid is often less than it would have been paid under the normal rules, but this varies from business to business.
- % will depend on the sector of business the company is in…
- Photography is %, retailers of food/newspaper is 4% (defined from HMRC ranging from 4% to 14.5%.
- There is a 1% discount applied to the rate in the business’s first year of VAT registration.
- Accounting records are therefore simplified as there is no requirement to split VAT as outputs and inputs, or to maintain a detailed control account, thus the completion of the VAT return is much more straightforward.
Describe the VAT return from flat rate scheme
INPUT TAX - as there is no deduction, NONE is entered into box 4, 7, and 9
OUTPUT TAX - box 6 and 8 contain VAT INCLUSIVE sales. Figure calculated by applying % to VAT inclusive sales will be the output VAT entered into box 1.
Business will still be required to issue VAT invoices to those customers who are VAT registered the normal way.
Advantages and disadvantages of flare rate scheme
+ Simplified records
+ Can be less VAT payable
+ First year discount given of 1%
- May pay higher amount of VAT
- % is applied to all sales, zero and exempt too.
- No input VAT is reclaimable
The flare rate is NOT…
- The rate of VAT being charged—is the rate used to calculate the amount owed to HMRC
Describe a limited cost business
- If the amount a business spends on goods is less than 2% of its turnover or less than £1,000 per year (if the costs are more than 2%) then the business will be classified as a Limited Cost business.
- This means the business will use a flat rate percentage of 16.5% irrespective of what the business does.
- This is a rolling 12 month period, so this test should be performed every time a VAT return is submitted.
Describe capital expenditure
- Normally with flat rate scheme, we would not claim any VAT back on items purchased.
- However, if business buys a large piece of machinery, they will be charged VAT.
- As long as the machinery is being used in the business and not being bought to sell on or lease out and the amount of the purchase is £2,000 or more (including VAT) then the business can claim the VAT back.
- This amount of VAT is entered into box 4 of the return.
- If purchase relates to services, purchases of £2,000 or less (including VAT) or multiple purchases, no VAT is claimable.
