Appropriate VAT Scheme

VAT Percentage in UK

A business must register with HMRC if the VAT Taxable Turnover is over £85,000 and file for VAT tax returns. VAT in the UK is fixed at 20% on most goods and services but it varies for some. It can be as low as 0% – 5% on some products and services like healthcare, construction, and children’s products.

VAT Schemes in the UK

Choosing the right VAT scheme for your company and tax structure will save you money and time while enhancing your cash flow at the same time.

Whether you’re an individual, a partnership, a limited company, a family business, a contractor, or a landlord, Lanop‘s VAT and tax specialists will help you choose appropriate VAT schemes for you.

Lanop provides comprehensive assistance on several VAT schemes like:

• Point-of-Sale scheme

This scheme works by identifying VAT liability of goods and services you sell at the time of the sale. Which means using a till system that can distinguish between goods sold at different rates of VAT.

You can use the Point-of-Sale Scheme if you are a retailer making supplies at 2 or more VAT rates and can identify the correct liability of supplies at the time of sale.

• Apportionment Scheme

There are two types of apportionment schemes

• Type 1

Apportionment Scheme 1 is a simpler scheme designed for smaller businesses with a tax exclusive retail turnover not exceeding £1 million.

Under this scheme, you work out the value of your purchases for retail sales at different rates of VAT and apply the proportions of those purchase values to your sales.

Your takings are treated as standard-rated, reduced-rated and zero-rated in the same proportions if for example:

50% of the value of your goods purchased for retail sale are standard rated
30% are lower rated
20% zero-rated

You then calculate your output tax by applying the relevant VAT fraction (or fractions if more than one positive rate is used) to these positive-rated takings.

Once a year you must make a similar calculation based on your sales and purchases for the whole year. This is compared with the tax you have paid to correct any over or under payment.

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• Type 2

Apportionment Scheme 2 is available to businesses with a retail turnover, excluding VAT, not exceeding £130 million. Under this scheme you calculate the ESP of standard and reduced-rated goods you receive for retail sale first and then work out the ratio of these to the ESP of all goods received for retail sale and finally, apply this ratio to your takings.

For example, 60% of your takings are treated as standard-rated and 40% as zero-rated if:

60% of the ESPs of all goods you receive for retail sale are standard rated
40% are zero-rated

You then calculate your output tax by applying the relevant VAT fraction to these figures for takings.

This scheme works on a rolling 12-month period, that is, at the end of every VAT period, the calculation apportions that period’s DGT by the total ESP of the previous 12 months.

This scheme can be complex to operate but, if operated correctly, will provide a more accurate valuation of your supplies than Apportionment Scheme 1 over the same period.

• Direct Calculation Scheme

This scheme works by calculating the ESP of goods for retail sale at 1 or 2 rates of VAT to establish the proportion of your DGT on which VAT is due. Here, ‘class of goods’ means all goods attracting the same VAT rate on sale.

The direct calculation schemes can be relatively simple if you have a small proportion of supplies at one rate. But they can produce significant inaccuracies if ESP are not calculated accurately. Additionally, they can be complex to work if you sell goods at 3 or more rates of taxation.

There are two types of direct calculation schemes:

• Scheme 1

cannot be used if your annual tax exclusive retail turnover exceeds £1 million
permits you to calculate the ESP of minority or majority class of goods

• Scheme 2

requires an annual stock adjustment to correct any under or over payments of VAT during a fiscal year
requires you to always calculate the ESP of your ‘minority goods’

• Flat Rate Scheme

The VAT Flat Rate Scheme is a way of paying VAT whereby a business pays a fixed percentage of its annual turnover.

The VAT Flat Rate Scheme is designed to help simplify the VAT return processes for small businesses. It is intended to ensure that businesses pay roughly the same amount of VAT without having to complete as much paperwork as other VAT schemes.

With the Flat Rate Scheme, businesses keep the difference between the amount of VAT paid to HMRC and the amount of VAT paid by customers.

• Cash VAT Accounting

Cash Accounting VAT Scheme is a method of reporting VAT whereby VAT is recorded based on payments made or received.

The VAT Cash Accounting Scheme follows the principles of cash accounting, meaning that income is recorded when it is received, and expenses are recorded when they are paid out.

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