VAT isn’t exactly a business owner favourite, but the right VAT scheme can make your life easier especially when it comes to cash flow and cutting down on admin.

In our Back to Basics series, we’ve already covered the importance of meeting deadlines and squirrelling away money for tax liabilities. This time, we’re looking at another common area where small tweaks can have a big impact: your VAT scheme.

We often speak to business owners who are on the default scheme without realising there are better options out there. The problem? The wrong setup can mean paying VAT before your customer pays you or wasting hours on unnecessary paperwork.

The good news is, HMRC offers several VAT schemes, and with the right advice, most businesses can pick one that suits the way they work.

What are the different VAT schemes?

Here’s a quick breakdown of the main options and what they’re best for.

Standard VAT Accounting (The default)

This is the scheme most businesses start on. You account for VAT based on the invoice date, not when the money actually hits your bank. So if your customer is a slow payer, you’re still handing over VAT to HMRC while you wait.

Works well for: Businesses with instant payments (like retail or online shops) as you claim your VAT back back on invoice date too or with reliable customers or staged payments.
Watch out: If cash flow’s tight or late payments are common, this one can sting.
Extras: You file quarterly, but if you’re usually owed a VAT refund, you can ask to file monthly.

Flat Rate Scheme

Designed for smaller businesses with turnover under £150,000 (excluding VAT), this one keeps things simple. You apply a fixed VAT rate (based on your industry) to your gross turnover and that’s what you pay HMRC. No tracking VAT on every expense.

What you gain: Simpler records, predictable payments.
What you lose: You can’t reclaim VAT on most purchases, only on capital assets over £2,000 (VAT included).
Tip: You get a 1% discount in your first year of VAT registration. But if HMRC classes you as a “limited cost trader,” you’ll be charged 16.5% which often wipes out the benefit. We can help you check if you fall into that category before you commit.

Cash Accounting Scheme

A good choice if you’re juggling late payers or uneven cash flow. You only pay VAT when your customer pays you, and you only reclaim VAT once you’ve paid your suppliers.

Best for: Businesses hit by late payments or seasonal dips in income.
Eligibility: Turnover under £1.35 million (you can stay in until it reaches £1.6 million).
Worth noting: You’ll need to track both invoice and payment dates. We often set up simple systems to make this painless.

Annual Accounting Scheme

This one cuts admin by letting you file a single VAT return each year. You make advance payments throughout the year (monthly or quarterly), based on your estimated VAT bill.

Suits: Businesses with steady turnover and a good handle on cash flow.
What to watch: If income is unpredictable, you could end up overpaying or underpaying.
Eligibility: Same limits as Cash Accounting, £1.35 million turnover to join, £1.6 million to stay in.

VAT Margin Scheme

This scheme is for second-hand goods dealers, think antiques, used tech, collectables. Instead of paying VAT on the full sale price, you only pay it on the difference between what you paid and what you sold the item for.

Upside: You only pay VAT on your margin.
Downside: Record-keeping is more detailed, you’ll need proper invoices and a stock book.
Note: This only applies to specific types of goods. We can help you check if your items qualify.

VAT Retail Schemes

If you’re selling high volumes of low-value goods, it’s not always practical to record VAT on every single sale. HMRC offers three simplified schemes for retailers:

  • Point of Sale Scheme – VAT calculated at the till.
  • Apportionment Scheme – Based on the VAT status of the goods you buy.
  • Direct Calculation Scheme – Based on the actual mix of goods you sell.

Great for: Shops, cafés, or any business with lots of small transactions.
We can help: These are a bit more technical, so if you’re not sure which fits best, we’ll walk you through the options.

How to choose the right scheme – A quick summary

Here’s a quick summary to help you weigh up your options:

SchemeProsConsBest for
Standard VAT AccountingReclaim VAT on expensesPay VAT before getting paidBusinesses with predictable income
Flat Rate SchemeSimple, fixed-rate VATCan’t reclaim VAT on most costsSmaller businesses with minimal expenses
Cash Accounting SchemeHelps with cash flowCan’t reclaim until supplier is paidBusinesses with late-paying customers
Annual Accounting SchemeLess paperwork, fixed paymentsRisk of under/overpaymentSteady-income businesses wanting less admin
Margin SchemeVAT only on profit marginComplex recordsSecond-hand sellers like antique or tech resellers

FAQs

Can I switch schemes later?

Yes as long as you meet the eligibility criteria. You might even be able to combine some (e.g. Flat Rate and Annual Accounting), depending on how your business works.

How do I change VAT schemes?

Some changes require HMRC approval, others just need to be noted on your VAT return. Either way, we’d usually recommend switching at the end of a VAT period to avoid complications.

Can I reclaim VAT under the Flat Rate Scheme?

Not usually. Only on capital assets over £2,000 (including VAT).

What about reclaiming VAT under the Margin Scheme?

You can’t reclaim VAT on the goods you buy to resell, but you can still reclaim VAT on general business expenses.

Not sure which scheme is right for you?

Choosing the wrong scheme can quietly drain your cash flow or pile on extra admin you don’t need. We help clients review their VAT setup all the time and in many cases, a small switch has made a big difference.

If you’re not sure which scheme fits your business, we’re happy to talk it through.

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