VAT schemes compared: flat rate, cash accounting and annual accounting

Once you are VAT registered, you can choose to join one of HMRC’s schemes. Each changes how you work out VAT or when you pay it. They are not right for everyone, and the limits change, so check GOV.UK and speak to an accountant before you join.

1. Flat Rate Scheme

You pay HMRC a fixed percentage of your gross turnover, instead of working out VAT on each sale and purchase. The percentage depends on your business type.

• Who can join: businesses expecting taxable turnover of £150,000 or less (excluding VAT) in the next 12 months.
• Leaving: you must leave if turnover goes above £230,000.
• Still charge VAT at normal rates on your invoices, but you do not reclaim VAT on most purchases (there is an exception for some larger capital assets).
• First-year discount: a 1% reduction in the flat rate in your first year of VAT registration.
• Limited cost traders: if you spend very little on goods, a higher 16.5% rate applies.

Good for: service businesses with few costs, who want simple returns. Not good for: businesses with lots of VAT-able purchases, because you cannot reclaim that VAT.

2. Cash Accounting Scheme

You account for VAT when you are paid and when you pay suppliers, not when invoices are issued.

• Who can join: expected taxable turnover of £1.35 million or less.
• Leaving: you must leave if turnover goes above £1.6 million.

Good for: businesses with slow-paying customers, because you do not pay VAT to HMRC on an invoice before you are paid. Watch out: you can only reclaim VAT on purchases once you have paid them.

3. Annual Accounting Scheme

You file one VAT return a year instead of four, and make advance payments during the year based on an estimate.

• Who can join: expected taxable turnover of £1.35 million or less.
• Payments: usually nine monthly or three quarterly instalments, then a balancing payment with the annual return.

Good for: steady businesses that want less admin and predictable payments. Not good for: businesses that regularly reclaim VAT, because you wait longer for refunds.

Which should you choose?

• Few purchases and simple sales: look at the flat rate scheme.
• Customers pay late: look at cash accounting.
• You want fewer returns and steady payments: look at annual accounting.
• Lots of VAT-able costs: you may be better off on standard VAT accounting.

You can often use cash accounting and the annual scheme together. Flat rate and cash accounting are combined in a special way, so ask an accountant.

Before you join

1. Estimate your next 12 months of turnover and costs.
2. Compare the VAT you would pay under each method.
3. Check your software supports the scheme you choose.
4. Ask HMRC or your accountant to confirm eligibility.

For the basics, see our guide to VAT registration.

How AvrioBooks helps

Tax rates and VAT returns are available on the Standard plan and above. Scheme treatment depends on your setup, so check the help centre and ask your accountant. See VAT software.

Frequently asked questions

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