I run a small limited company as a digital consultant with roughly £60k turnover per year. My costs are minimal, maybe about £5k. I am about to register for VAT on the flat rate scheme but I am unsure whether it is best for me to be on the cash accounting scheme or not?

VAT Flat Rate Scheme and Cash Accounting Scheme

 

UPDATE March 2017 – before reading this article please be aware of the flat rate scheme changes from April 2017 for limited cost traders, see our article HERE.

 

Registering for VAT via the flat rate scheme can have significant administrative benefits over traditional VAT registration.

Under the flat rate scheme you pay over a flat percentage of you total sales to HMRC dependent upon which sector you operate in.

However bear in mind that any gain made on the flat rate scheme will be taxable as it is additional income for your company.

When you join the flat rate scheme you also need to decide if you are going to report your VAT returns under the VAT cash accounting scheme or the standard scheme and there is one critical distinction between them.

Under the cash accounting scheme you only pay HMRC the VAT owed once you have actually received the cash from your customers as opposed to when your invoice is dated / raised (often referred to as the tax point).

In your case the real benefit of the cash accounting scheme would be that of a cash flow nature. If you consistently get paid a fair time after you raise invoices then the amounts paid to HMRC will be deferred in this respect.

For example:

On 30 June 2015 you raise an invoice to a UK customer for £12,000 (£10,000 net plus £2,000 VAT) and you do not actually receive the payment from the client until 1 Aug 2015.

Let’s assume your VAT quarter end is 30 June 2015 and your current VAT flat-rate percentage is 12.0%.

£1,440 of VAT is payable to HMRC in respect of this invoice (12% x £12,000)

On the standard flat rate scheme the amount is payable by 7th August 2015 as it is included on the VAT return quarter ended 30 June 2015 whereas under the cash accounting scheme this amount would be deferred until 7th November 2015 as it would be on the next quarters VAT return & as such a cash flow benefit arises.

There are other nuances to the scheme including with regard to de-registration at certain levels of turnover not discussed in this post.

We recommend you read our detailed article on the flat rate scheme HERE