VAT Schemes

HMRC offers several VAT simplification schemes designed to reduce administrative burdens for businesses. Choosing the right scheme can simplify your VAT accounting, improve cash flow, or reduce your VAT bill. This guide explains the main schemes available and their eligibility criteria.

Flat Rate Scheme

The Flat Rate Scheme (FRS) is available to businesses with expected VAT-exclusive turnover of £150,000 or less (excluding VAT). Under the scheme, you pay HMRC a fixed percentage of your gross turnover, which varies by trade sector — for example, 2% for food retailers, 9.5% for computer repair services, and 13% for catering businesses. You continue to charge customers 20% VAT but keep the difference between what you charge and what you pay to HMRC. The scheme is particularly beneficial for businesses with low input VAT. Businesses with turnover above £230,000 must leave the scheme. A 1% discount applies in the first year of registration.

Annual Accounting Scheme

The Annual Accounting Scheme allows businesses to submit one VAT return per year instead of four quarterly returns. You make interim payments of 10% of the estimated annual liability, paid monthly or quarterly by direct debit, with a balancing payment when the annual return is filed. This scheme reduces paperwork and gives certainty about payment amounts. Eligibility requires expected VAT-exclusive turnover of £1.35 million or less.

Cash Accounting Scheme

Under the Cash Accounting Scheme, you account for VAT on the basis of payments received and made, rather than on invoices issued. This means you do not have to pay HMRC until your customer has paid you, which can significantly improve cash flow for businesses that give credit. The scheme is available to businesses with expected VAT-exclusive turnover of £1.35 million or less. You must leave the scheme if turnover exceeds £1.6 million.

Margin Scheme

The Margin Scheme applies to dealers in second-hand goods, works of art, antiques, and collectors' items. VAT is charged on the profit margin (the difference between the purchase price and selling price) rather than on the full selling price. The scheme prevents double taxation of goods that have already borne VAT. You can account for VAT on the margin of individual items or use a global basis. The scheme requires specific records and invoices showing the margin rather than full VAT.

VAT Retail Schemes

Retailers can use one of several VAT retail schemes designed for businesses that sell a mix of zero-rated, reduced-rate, and standard-rated goods to the public. The main schemes are: Point of Sale Scheme (using tills that identify the rate at sale), Apportionment Scheme (using purchases to estimate the mix of sales), Direct Calculation Scheme (for certain standard-rated goods), and Bespoke Scheme (by HMRC agreement). Each scheme has specific eligibility criteria and record-keeping requirements.