Introduction

•      Whilst the concept of VAT may be simple, like many other taxes it has become over time a complex tax. This is partly reflected in the variety of schemes which have developed to deal with particular situations and businesses, typically where the operation of the basic VAT framework is felt to introduce distortion to trade.

Schemes covered

•      These notes cover the following:

o    Annual accounting scheme

o    Cash accounting scheme

o    Flat rate scheme

o    Margin schemes

o    Capital goods scheme

o    Retail schemes

•      It does not cover industry-specific schemes, such as the Tour Operators’ Margin Scheme.

Annual accounting scheme

•      This scheme is available to businesses with taxable supplies not exceeding £1.35 million for the year prior to application to join. They can stay in the scheme unless and until their turnover for a VAT year exceeds £1.6 million.

•      The scheme is not available in conjunction with a group registration.

•      The scheme involves a taxpayer nominating an annual accounting year, and making up a single VAT return for that year. The period for filing this return is extended from the usual 1 month to 2 months. During the accounting year the taxpayer will make ten monthly payments on account, each being 10% of the previous year’s final VAT liability. There is then a balancing payment or repayment when the return is submitted.

•      The scheme simplifies VAT administration by requiring only one annual VAT return.

•      The scheme is particularly advantageous for growing businesses, where turnover and profitability are rising, as it generates an inbuilt cash flow advantage on the basis that the payments on account are always based on historic figures.

Cash accounting scheme

•      The VAT system is based upon the date that supplies are invoiced rather than paid for.

•      Use of the cash accounting scheme enables a business to instead account for VAT on the basis of the date that supplies are paid for.

•      This applies equally to a taxpayer’s output and input VAT.

•      The turnover limits for eligibility are the same as for annual accounting.

•      The scheme is particularly attractive for businesses that invoice their sales and have customers who take time to pay their bills.

•      The scheme offers automatic bad debt relief, as opposed to the cumbersome system applicable using the normal basis of VAT.

Flat rate scheme

•      This is available for taxpayers whose taxable supplies do not exceed £150,000 and whose total turnover does not exceed £187,500.

•      It allows them to account for VAT on taxable supplies at a flat rate (below the standard rate of VAT) specific to their business, whilst continuing to collect VAT at the full rate from customers.

•      In return for this, no input VAT is recoverable, except on capital expenditure exceeding £2,000.

•      A business can stay in the scheme until its VAT inclusive turnover exceeds £225,000 per year.

•      The scheme greatly simplifies accounting for VAT, as the taxpayer simply needs to apply the relevant flat rate to gross turnover to calculate the VAT due.

•      The rates are set at levels that mean most small businesses benefit from using the scheme.

•      There is a published table of scheme flat rates.

Margin schemes

•      Margin schemes can apply to sales of second-hand goods other than:

o    Precious metals

o    Precious stones (not mounted, set or strung)

o    Works of art

o    Collectors’ items; and

o    Antiques

•      The basic margin scheme requires the  taxpayer to maintain a detailed record of individual second-hand items. On sale of an item, the taxpayer accounts for VAT only on the profit margin on sale, not on the entire sale price

•      If the margin is negative, it is treated as nil for VAT purposes.

Global margin scheme

•      This is a variant on the basic margin scheme, suitable for low value, bulk volume goods where it is impractical to keep records of individual items. Instead, in each accounting period tax is paid on the basis of total sales less total purchases. This variant allows automatic relief for losses on disposal of particular items.

Capital goods scheme

•      Whereas most VAT schemes are methods of computing VAT on sales, this is a method that involves adjusting input VAT reclaimed on purchases of large capital items.

•      Its application is mandatory for purchases of land and buildings for £250,000+ or computer equipment for £50,000+

•      The scheme is only of relevance where, at some point in the 10-year (land & buildings) or 5-year (computers) period beginning with the acquisition of the asset, the business is partially exempt for VAT purposes (that is to say that it makes some VAT-exempt supplies).

•      The scheme works as follows:

o    In the period of acquisition, the recoverable percentage of the total VAT incurred on that acquisition is the percentage of supplies for the period that are taxable.

o    In subsequent periods of acquisition, that initial recovery is adjusted by reference to the percentage of taxable supplies in that period.

Capital goods scheme – example

•      A computer is acquired on 1 April 2010 for £117,500 (£100,000 + VAT).

•      The percentages of taxable supplies for the next 5 years are as follows:

Y/e 31.03              Percentage

2011                   57%

2012                   52%

2013                   61%

2014                   58%

2015                   64%

•      Period 1 – recovery £17,500 * 57% = £9,975 recovered

•      Period 2 – adjustment (£17,500/5) * (52% – 57%) = £175 paid

•      Period 3 – adjustment (£17,500/5) * (61% – 57%) = £140 recovered

•      Period 4 – adjustment (£17,500/5) * (58% – 57%) = £35 recovered

•      Period 5 – adjustment (£17,500/5) * (64% – 57%) = £245 recovered

Retail schemes

•      Retail schemes have been in existence ever since the introduction of VAT in 1973, because of the impracticality of shopkeepers keeping track of sales of individual items at various rates of VAT.

•      HMRC will now consider critically the need for a particular retailer to use a scheme, in view of the availability of sophisticated point of sale technology by way of tills, bar codes etc.

•      These notes merely summarise the available schemes rather than describing them in detail.

•      Point of sale scheme

o    Only available scheme if all supplies taxable at the same VST rate

o    £100 million turnover limit

o    No stocktaking , expected selling price calculations or annual adjustment

o    Requires electronic till and staff competent to use it.

Apportionment Scheme 1

o    Not for services, catering supplies, self-made or self-grown goods.

o    Turnover limit £1 million

o    No stocktaking or expected selling price calculations

o    Annual adjustment required

o    Relatively simple, but unfavourable if zero-rated goods achieve a higher mark up than standard-rated goods.

 

Apportionment Scheme 2

o    Not for services or catering supplies

o    £100 million turnover limit

o    Stock take required at start of scheme

o    Work out expected selling prices

o    No annual adjustment, but use rolling calculation

o    Can be complex but produces accurate result if used properly

Direct Calculation Scheme 1

o    Not for catering supplies

o    £1 million turnover limit

o    Work out expected selling prices

o    No stock taking

o    No annual adjustment

o    Simpler with 2 rates of VAT than with 3.

Direct Calculation Scheme 2

o    Not for catering supplies

o    £100 million turnover limit

o    Work out expected selling prices

o    Annual stock takes

o    Annual adjustment required

Summary & Conclusion

•      So, if you:

o    Have problems with bad debts or delayed payment by customers;

o    Have turnover below £150,000;

o    Sell second-hand goods;

o    Are a retailer; or

o    Have bought or are about to buy a building or expensive computer equipment

•      Contact Mark Simpson:

 

•      Telephone  0161 886 8062

•      E-mail mark.simpson@sbnca.com

 

    for advice and assistance on planning your VAT affairs

 

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