Once you’ve registered for VAT, you’ll need to decide what VAT scheme is right for your business. There are 4 general VAT schemes you can choose from and we’ll explain exactly how they work and who they’re suitable for.

Please note, there are specialist VAT schemes that are available but are not covered here. 

Standard VAT Accounting Scheme

This is the most common scheme and accounts for VAT on the basis of when your sales and purchase invoices are dated, regardless of when payment is made or received.

Any business can use this method regardless of size and level of turnover.

VAT returns are submitted to HMRC on a quarterly basis of your choosing.

Cash Accounting Scheme

This scheme allows you to account for VAT on the date you’re paid as opposed to the date of the invoice, as in the standard scheme. This is really helpful if you have slow payers since you won’t have to pay the VAT to HMRC until you’ve been paid by your customers.

This option isn’t well suited to businesses that buy a lot of items on credit, as likewise, you can’t reclaim the VAT on your purchases until you have paid for them. 

You still have to complete your VAT returns every quarter. 

Once your business turnover exceeds £1.35m you can no longer use the cash scheme and have to move to the standard scheme.

Annual Accounting Scheme

This is similar to the standard VAT accounting method, except you have an annual VAT reporting and payment deadline. You can keep this the same as your corporation tax filing date to keep things simple. 

Once you complete the VAT return you start making quarterly payments for the VAT you estimate that you’ll owe. This method is often better for cash flow as the payments are spread throughout the year. However, you may end up overpaying or underpaying HMRC, so you may be required to make a final balance payment or apply for a refund. 

Businesses with an annual turnover of about £1.35 million can’t use the annual accounting scheme. 

Flat Rate Scheme

The FRS is great for small businesses as it allows you to simply pay a percentage of your total turnover, as VAT. The actual amount you pay depends on the relevant percentage for the type of business you run. You can find out more about that here.

You’ll still have to charge VAT on your invoices at 20%, but you don’t have to account for the VAT details of every purchase or sale. Only smaller businesses with an annual turnover of up to £150,000 can join this VAT scheme.

This can include exemption and partial exemption from VAT.

Some goods and services are exempt from VAT. So if all the goods and services you sell are exempt then your business is exempt and you will not be able to register for VAT. 

There are some goods and services on which VAT is not charged (exempt) including: 

• Insurance, finance and credit
• Education and training
• Fundraising events by charities 
• Subscriptions to membership organisations
• Selling, leasing and letting of commercial land and buildings

These items are exempt from VAT so are not taxable. You do not include sales of exempt goods or services in your taxable turnover for VAT purposes and if you buy exempt items, there is no VAT to reclaim. 

Exempt items are different from zero-rated supplies. In both cases, VAT is not added to the selling price, but zero-rated goods or services are taxable for VAT- at 0%. 

Zero-rated means that the goods are still VAT-taxable but the rate of VAT you must charge your customers is 0%. You still have to record them in your VAT accounts and report them on your VAT return. Examples include:

• Books and newspapers
• Children’s clothes and shoes
• Motorcycle helmets
• Most goods you export from England, Wales and Scotland to a country outside the UK
• Most goods you export from Northern Ireland to a country outside the EU and the UK
• Goods you supply from Northern Ireland to a VAT registered EU business

To pay your VAT bill you can set up a direct debit to ensure you never pay late. Alternatively, you can pay online using the following bank details:

Sort code:08-32-00

Account number: 11963155

Reference: Your VAT registration number