What are VAT special schemes?

There are three main VAT schemes available to small businesses:

  • The flat rate scheme
  • The annual accounting scheme
  • The cash accounting scheme

The Flat Rate Scheme

The purpose of this VAT scheme is to simplify the way a business accounts for VAT and so reduce the cost of complying with their VAT obligations. With the VAT Flat Rate Scheme you pay VAT as a fixed percentage of your VAT inclusive turnover. The actual percentage you use depends on your type of business. The scheme is open to businesses that expect their annual taxable turnover in the next 12 months to be no more than £150,000, excluding VAT.

This is very different to the normal VAT accounting procedure where the VAT you pay to HMRC is the difference between the VAT you charge your customers and the VAT you pay on your purchases. The main advantage of the scheme is a reduced VAT bill. However, there are also cash flow benefits and the rules are much more straightforward than for traditional VAT accounting.  A number of changes were made to the scheme earlier this year and it is important to ‘run the numbers’ to check if using the scheme remains beneficial.

Annual Accounting Scheme

The Annual Accounting Scheme is also aimed at smaller businesses. It can either be combined with the Flat Rate Sscheme or used by a business which uses standard VAT accounting.  The scheme is open to businesses with a taxable turnover up to £1.35 million.

The annual accounting scheme reduces administration time and the associated cost of preparing and submitting quarterly VAT returns. The scheme can also help a business manage cash flow. Businesses that use the scheme are only required to file one VAT return at the end of each year.

Cash Accounting Scheme

Another popular small business scheme is the Cash Accounting Scheme.  Under standard VAT accounting, VAT is payable on sales whether or not the customer has paid and can lead to a need to claim bad debt relief. Under this scheme VAT does not need to be paid over until the customer has paid. If the customer does not pay then the VAT is not payable. This clearly has cash flow benefits for traders which sell on credit.  By contrast, using standard VAT accounting a business pays VAT on their sales whether or not they have been paid by their customer.

A business can enter this scheme provided the estimated VAT taxable turnover for the next VAT year is not more than £1.35 million. It can continue to use the scheme until the VAT taxable turnover exceeds £1.6 million. Businesses can’t use the flat rate scheme together with the cash accounting scheme. However, the flat rate scheme has its own cash based method for calculating turnover.

Planning note

Please call if you would like us to review your present VAT scheme to ensure that it produces the best outcome for your business.

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Case Studies

The Tax Man

Minimise the stress of an investigation and make use of our extensive experience in securing best outcome for our clients

Business Valuation in Distress

Take advantage of our impartial and rigorous due diligence procedures

FD in The Cupboard

Our innovative ideas are here to improve your business performance and secure appropriate and cost effective funding

The Tax Man

The Tax Man

A new client was introduced to us via a recommendation with whom we arranged to meet on a regular basis in order to determine a number of changes that we felt were needed to their business structure. The client was at the time operating as a husband and wife partnership. The business was flourishing and had a number of large contracts with big organisations.

At the start of the process they were still heavily immersed in their day to day operations so we can get a full flavour for their ambitions, aspirations and growth plans. We quickly recognised there were sufficient tax savings which can be achieved by changing the structure from a partnership to a corporate entity. We carried out a business valuation and disposed of the goodwill from the old to the new business. Unfortunately, as often is the case with efficient tax planning, HMRC got involved and disputed our valuation.

An HMRC investigation can be a very stressful time for any client, even for those best prepared. However, our client had minimal input in the HMRC communication as we dealt with this professionally behind the scene. As an added benefit, our client could rest on the security that all work was covered by insurance and therefore all costs and time in dealing with this enquiry were covered by the fee protection policy we had put in place.

The initial approach taken by HMRC was very aggressive and they tried to present an argument that there was no goodwill in the business. We challenged HMRC’s view that the goodwill was worthless. After lengthy correspondence and numerous telephone calls, HMRC agreed 100% with our original valuation, which preserved our original tax saving plan for the client. Tax savings on this case where in the region of £75K at the outset, with ongoing savings of £6,000 per annum. We are pleased to add another happy client to our portfolio.

Business Valuation in Distress

Business Valuation in Distress

Selling a business is never an easy process, but when disputes arise, the need for a reliable third party due diligence process is even greater.

Tearle & Carver have extensive understanding of the requirements for remaining objective when managing a potentially difficult company buyout. In one such case, we were approached by the courts to act as independent accountant for an acrimonious business sale in which one partner was exiting the business and selling shares to the other. Given the circumstances, both sides had totally polar views of what their business was worth.

After arranging an initial meeting with the company, we were thorough in ensuring we completed due diligence, validating the figures in the accounting records, carrying out adjustments where appropriate, and drafting a set of reliable management figures within the framework required by the court.

A draft version of the report detailing our findings and conclusions was submitted to both parties, giving them the opportunity to voice any queries or concerns and ensure all relevant factors had been taken into account.

Through this process, we were able to submit a final report to the courts that was both binding and acceptable to both parties, effectively resolving what could otherwise have been a time consuming and costly process for all sides.

FD in The Cupboard

FD in The Cupboard

For smaller companies, it is often not possible or cost effective to pay for a full-time Financial Director.
Many of our clients therefore make use of Tearle & Carver’s extensive expertise to provide the services of an FD as and when required.

In this case, we were approached by the management team of an organisation looking to acquire the existing business via an MBO (Management buy out). Their business plan had proved ineffective for securing funding, and what they needed was financial expertise from someone with a developed understanding of the company’s internal workings.

Tearle & Carver helped deliver the solution our clients were looking through utilising our bank contacts in order to make the MBO viable, while also building a robust business plan and preparing our client for the rigorous vetting process. To help with cash flow issues, we introduced factoring which led to improved cash flow management.

We advised on the appropriate business valuation and structure, and continued to prepare monthly accounts to track profgress once the management were fully in command of all the information they needed to move their business forward.

In order to best assist these clients through the crucial first year of ownership, we attended board meetings on a regular basis, a service that we continue to provide to date.

With our continually developing understanding of their business, this client is able to remain confident that Tearle & Carver can provide any financial support they may need, now and in the future.