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An examination of three VAT special schemes available to small businesses - annual accounting scheme, cash accounting and flat rate scheme for small businesses.

Annual Accounting Scheme

The Annual Accounting Scheme is available to taxable persons other than groups.  A person may apply to use the scheme if:

• he has reasonable grounds to believe  that the value of taxable supplies made within the 12 months from the date of application will not exceed £1,350,000
• his registration is not in the name of a group
• his registration is not in the name of a division, and
• he has not ceased to operate the scheme in the last 12 months.

The taxable person pays to HMRC by credit transfer:

(a) a quarterly payment of an agreed amount on the fourth, seventh and tenth month of the accounting year; or
(b) a monthly sum of an agreed amount in nine instalments starting with the end of the fourth month of the accounting year; and

makes a return and balancing payment by the end of the second month after the end of the accounting year, to the amount shown in the return.

This is of advantage to small businesses that prepare their accounts annually.

HMRC will terminate authorisation where:

• a false statement has been made on his application
• he fails to make a return by the due date
• he fails to make the agreed payment
• they have reason to believe that their taxable supplies for the year or period will exceed £1,600,000
• he has not made a return prior to authorisation
• it is necessary to do so for the protection of the revenue.

Cash Accounting

Cash accounting is another scheme available to small businesses, but the definition of small business is different. The threshold for joining the scheme is when taxable supplies are not more than £660,000 in a year and for leaving when taxable supplies exceed £825,000 in a year.

The taxpayer makes returns based on the cash received in a period, rather than invoices raised. This is useful for businesses with variable cash flows and automatically gives bad debt relief.

The scheme does not apply to:

• lease purchase agreements
• hire purchase agreements
• conditional sale agreements
• credit sale agreements
• supplies where a VAT invoice is issued and full payment of the amount of the invoice is not due for a period of more than six months from the invoice date
• supplies where a VAT invoice is issued in advance of the supply (unless the invoice relates only the part of the supply already made).

Flat-Rate Scheme for Small Businesses

Not to be confused with the flat rate scheme for farmers, this scheme is available to businesses whose taxable supplies in the next year will not be more than £187,500 and his total income not more than £225,000. These figures change each tax year.

It does not apply to:

• tour operators
• persons required to make adjustments under the Capital Goods Scheme
• persons intending to opt to account for VAT under a margin scheme.

The taxable person accounts for output VAT as a percentage of his turnover. The percentage varies according to the type of business and varies from 2% to 13.5%; these are set out in a table in VAT Regulations 1995 (SI 1995/2518).

He does not claim input tax.

A person may withdraw from the scheme at the end of a prescribed accounting period.  If he does so, he may not rejoin for 12 months.

[10/04/08]

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