VAT Schemes in the UK: Ultimate Guide for Entrepreneurs

Discover VAT schemes in the UK. Leave no stone unturned about each scheme to simplify tax, boost cash flow, meet business needs, and ensure compliance.
VAT Scheme in the UK

Table of Content

Hello there! Let’s start with a simple definition: VAT is a consumption tax levied at each stage of the supply chain, from the manufacturer to the consumer. In the UK, if your business’s annual turnover exceeds £90,000, it must go through VAT registration and start charging VAT on all goods and services it supplies.

VAT in the UK offers different schemes to ease the process and accommodate various business needs. These schemes are helpful when you are submitting a VAT return. In this concise guide, we’ll introduce you to the VAT schemes in the UK, helping you make an informed choice for your business.

Understand the VAT Schemes

If you are unfamiliar with VAT schemes, you might wonder what they are. No worries! We’ll learn together:

In the United Kingdom, VAT schemes are special tax arrangements or methods that governments use to simplify collecting VAT from businesses and provide certain benefits to specific groups of taxpayers. The VAT invoice, a crucial document in these schemes, plays a significant role in tracking and documenting the VAT paid at each stage of the supply chain.

VAT schemes in the UK are designed to make it easier for different types of businesses to comply with VAT regulations and to reduce the administrative burden associated with VAT.

Different Types of VAT Schemes

In the United Kingdom, several VAT schemes are designed to simplify VAT accounting and reporting for businesses. Take a look below to learn about the available VAT schemes in the UK:

  • Standard VAT Accounting Scheme.
  • VAT Flat Rate Scheme.
  • VAT Cash Accounting Scheme.
  • VAT Annual Accounting Scheme.
  • VAT Retail Scheme.
  • VAT Margin Scheme.
Types of UK VAT Schemes
Different Types of UK VAT Scheme.

Let’s explore the UK VAT schemes in detail:

Standard VAT Accounting Scheme

Businesses in the United Kingdom with taxable turnovers greater than the current £90,000 use the Standard VAT Accounting Scheme by default. This means that more prominent and more established businesses typically use this scheme.

This scheme is the most common way businesses can account for and pay VAT on their sales and purchases. Here are some critical insights into the Standard VAT Accounting Scheme:

Key Components:

The critical components of the Standard VAT Accounting Scheme are—

  • Output Tax: Businesses must charge VAT (output tax) on customer sales. HM Revenue and Customs (HMRC) is in charge of collecting this VAT.

  • Input Tax: Businesses can reclaim the VAT (input tax) they’ve paid on their purchases. This includes VAT on goods, services, and expenses directly related to their business activities.

    Businesses calculate their VAT liability by deducting the input tax (VAT on purchases) from the output tax (VAT collected from customers). The difference represents the amount of VAT they owe to HMRC.

VAT Payments:

Businesses are required to make VAT payments to HMRC after submitting their quarterly VAT returns. This payment is typically the difference between the output and input taxes.

Complex Accounting:

While the Standard VAT Scheme is the most common, it can be administratively complex. Businesses must accurately track and record all VAT transactions, which can be time-consuming. They need to maintain detailed records of sales and purchases to ensure they meet their VAT obligations.

Considerations for Businesses:

Businesses operating under the Standard VAT Scheme must know various VAT rules, VAT exemptions, and rates for different products and services. They should also be prepared for VAT inspections and audits by HMRC to ensure compliance.

VAT returns are typically submitted online, and businesses must meet the specified deadlines for submission and payment. Errors or late filings can result in penalties.

Additionally, you should learn that while the Standard VAT Scheme is mandatory for businesses exceeding the threshold, smaller businesses can voluntarily register for VAT. This can be beneficial in some cases, depending on the nature of their business activities and customer base.

VAT Flat Rate Scheme

The VAT Flat Rate Scheme is a simplified VAT accounting method designed to streamline the process for small businesses. It is one of the most discussed VAT schemes in the UK. This scheme offers a straightforward approach to VAT calculations, making it easier for businesses to manage their tax obligations.

Under this scheme, businesses with an annual turnover of £150,000 or less (excluding VAT) can join in the next 12 months. This means a business must leave the scheme once it exceeds this threshold.

Joining the Flat Rate Scheme is voluntary, and businesses can leave the scheme voluntarily as well. However, they must notify HMRC if they choose to leave.

Key Components:

The specific components of the VAT Flat Rate Scheme are—

  • Fixed Percentage: Businesses registered under the Flat Rate Scheme pay a fixed percentage of their gross turnover to HMRC. This percentage is lower than the standard VAT rate because businesses cannot reclaim VAT on most of their purchases.

  • Limited Reclaim of Input Tax: Businesses using the HMRC Flat Rate Scheme cannot usually reclaim VAT on their purchases, except for certain capital assets costing £2,000 or more (including VAT). This restriction is a trade-off for the simplified accounting process. While businesses using this scheme can reclaim VAT on certain capital assets, they cannot reclaim input tax on most purchases.

Simplified VAT Calculations:

Unlike the Standard VAT Scheme, businesses using the Flat Rate Scheme do not calculate VAT on each transaction individually. Instead, they apply the flat rate percentage to their total turnover, including VAT, and pay it to HM Revenue and Customs (HMRC). The flat rate VAT percentage varies based on the specific type of business.

This simplifies the accounting process and reduces administrative overhead, as businesses do not need to keep detailed input and output tax records for each transaction.

VAT Payments:

When businesses deal with customers, they still list prices that include VAT. However, the VAT paid to HMRC is calculated based on the flat rate percentage of their total turnover. This streamlines the pricing process for products and services.

Businesses can predict their VAT liability more efficiently, as the payment is based on a fixed turnover percentage.

Considerations for Businesses:

The Flat Rate Scheme can benefit small businesses with low input tax claims and straightforward VAT accounting needs. However, businesses should carefully consider their circumstances and consult an accountant to determine if this scheme is the most suitable option.

It’s essential for businesses to carefully choose the most appropriate flat rate percentage based on their primary business activity, as different industries have different rates. While the Flat Rate Scheme simplifies VAT calculations, businesses should consider their individual circumstances and assess whether it offers financial advantages before opting for this scheme.

Annual Accounting VAT Scheme

The Annual Accounting Scheme is a simplified method for businesses to manage their value-added tax (VAT) responsibilities in the United Kingdom. Under this scheme, businesses must only submit one VAT return per year instead of the usual quarterly returns required by HM Revenue and Customs (HMRC).

Your taxable turnover (excluding VAT) must be £1.35 million or less to join the scheme. This threshold can change, so checking the current threshold with HMRC is essential. If your taxable turnover is below the VAT threshold, you can still voluntarily apply for VAT registration and join the Annual Accounting Scheme.

Certain businesses, such as those involved in retail, catering, and hospitality, find this scheme particularly beneficial due to its simplified approach.

Key Components:

The critical components of the VAT Annual Accounting Scheme (AAS) are:

  • Annual VAT Return: Businesses using the Annual Accounting Scheme submit a single VAT return covering a full year’s trading activity. This simplifies the reporting process, especially for businesses with straightforward VAT affairs.

  • VAT Adjustments: At the end of the annual accounting period, businesses must calculate the actual VAT liability for the year and compare it to the total advance payments made. If the advance payments exceed the VAT liability, businesses receive a refund from HMRC. If they fall short, the business must pay the balance to HMRC.

Simplified Record-Keeping:

While businesses must maintain accurate records, the simplified reporting and payment schedule of the Annual Accounting Scheme can reduce the administrative burden, particularly for businesses with fluctuating turnover.

VAT Payments:

Businesses enrolled in the Annual Accounting Scheme must make advance payments towards their VAT bill during their accounting period. Instead of making quarterly VAT payments, businesses pay their VAT liability in installments throughout the year.

The payments are usually made on the account and are based on the previous year’s VAT liability, divided into smaller, manageable amounts.

At the end of the accounting year, businesses submit their final VAT return, adjusting for any discrepancies between the actual liability and the payments made on the account.

Considerations for Businesses:

The Annual Accounting VAT Scheme can benefit businesses with fluctuating turnover by providing more predictable VAT payments and reducing the administrative burden associated with quarterly reporting. It helps businesses manage cash flow more effectively by spreading VAT payments annually.

A careful estimation of VAT liability is crucial to ensuring that advance payments are reasonable. This needs to be accurate to avoid underpaying or overpaying.

VAT Cash Accounting Scheme

Another option HM Revenue and Customs (HMRC) in the United Kingdom offers to qualified businesses is the VAT Cash Accounting Scheme, which offers a streamlined approach to VAT accounting. This scheme focuses on when VAT payments are made and received, allowing businesses to account for VAT based on cash movements rather than invoice dates.

This scheme is designed to assist businesses in managing their cash flow effectively. Businesses with a taxable turnover of up to £1.35 million can opt for the VAT Cash Accounting Scheme. It is particularly beneficial for smaller businesses and those with irregular payment schedules.

Key Components:

The critical components of the VAT Cash Accounting Scheme are:

  • Improved Cash Flow Management: The scheme benefits businesses with cash flow challenges, as they only pay VAT on the funds they’ve received from their customers. This can enhance financial stability, especially for smaller businesses or those with irregular income patterns.

  • Reclaiming Input Tax: Businesses using the Cash Accounting Scheme can only reclaim the VAT incurred on their purchases (input tax) once they have paid their suppliers. In contrast, the standard VAT accounting method allows reclaims once a VAT invoice is received, even if the payment to the supplier is pending.

Simplified Reporting:

The VAT Cash Accounting Scheme simplifies the reporting process, especially for businesses with customers who tend to delay payments. It ensures that businesses are not out of pocket due to unpaid invoices.

VAT Payments:

Under this scheme, businesses only pay HM Revenue and Customs (HMRC) VAT when they receive customer payments.

Considerations for Businesses:

One drawback of this scheme is that adequate debt relief is limited. Businesses can only reclaim VAT on bad debts if they have included the corresponding output tax in their VAT returns.

When using the VAT Cash Accounting scheme, monitoring payments from customers and suppliers is essential to maintaining accurate VAT records and compliance with the scheme’s regulations. This ensures the correct calculation of VAT liabilities and reclaims.

VAT Retail Scheme

The VAT Retail Scheme is specifically designed for retail businesses. This allows businesses to calculate their simplified VAT liabilities primarily based on the type of goods they sell. Retail businesses with an annual taxable turnover not exceeding £1.35 million can participate in the VAT Retail Scheme.

The scheme is particularly beneficial for smaller retail establishments, providing them with a straightforward way to manage their VAT obligations.

There are three standard VAT retail schemes available:

  1. Point of Sale Scheme: Businesses identify and record VAT at the time of sale under this scheme. It simplifies VAT calculation for goods sold, including VAT, as the business deducts the VAT it must record.

  2. Apportionment Scheme: Businesses using this scheme buy goods for resale. VAT calculation becomes more straightforward as the scheme applies to goods sold exclusive of VAT. The VAT is added during calculation.

  3. Direct Calculation Scheme: This scheme is suitable for businesses making a small proportion of sales at one VAT rate and the majority at another rate.

Key Components:

The critical components of the VAT Retail Scheme are:

  • Simplified Calculation Methods: The VAT Retail Scheme offers various simplified calculation methods tailored to different types of retail businesses. These methods simplify the process of determining VAT liabilities.

  • Typical Calculation Methods: Under the scheme, businesses can choose from typical calculation methods, such as the Point of Sale Scheme or Apportionment Scheme, depending on the nature of their sales. VAT is calculated based on the differing VAT rates applied to specific sales, simplifying the overall process.

  • Limited Input Tax Reclaims: Retail businesses using the VAT Retail Scheme may be limited in reclaiming input tax. Simplified computation methods mitigate this limitation and make it easier for firms to comply with VAT requirements.

Considerations for Businesses:

Retailers must carefully select the most suitable calculation method under the VAT Retail Scheme based on their business operations and the types of goods they sell.

Compatibility with Other Schemes:

Retail schemes can be used in conjunction with the Cash Accounting Scheme and the Annual Accounting Scheme, providing businesses with flexibility in managing their VAT obligations. However, it’s necessary to learn that the retail scheme can’t be used alongside the flat rate scheme.

VAT Margin Scheme

Among the array of VAT schemes available, one noteworthy option is the VAT Margin Scheme. This scheme applies to businesses selling second-hand goods, works of art, antiques, and collectors’ items. Items eligible for the scheme are those purchased without VAT.

Unlike traditional VAT calculations, margin schemes tax the difference between an item’s purchase and selling prices rather than the total selling price.

Key Components:

The critical components of the VAT Margin Scheme are:

  • Starting the Scheme: Businesses can use the margin scheme anytime by maintaining accurate records and reporting it on their VAT return. There is no requirement for formal registration to use the margin scheme.

  • Eligible Items: The criteria for determining the eligibility of products for the reduced rate under the scheme are characterized by a high level of stringency. Additionally, many requirements must be met for the sale to proceed.

  • Exceptions and Special Cases: There are specific rules and exceptions for items such as second-hand vehicles, horses and ponies, houseboats and caravans, and pawned items. High-volume, low-priced items can be managed through the Global Accounting Scheme, a simplified version of the VAT Margin Scheme.

  • International Trade: Different rules apply if you import from or export to countries outside the UK. It’s essential to check the specific regulations regarding international transactions.

VAT Calculation:

When selling an eligible item, VAT is calculated at 16.67% (one-sixth) of the difference between the purchase and selling price. Assume that a business purchases a piece of antique furniture for £800 (excluding VAT) and sells it for £1,200 (excluding VAT). The difference between the selling and purchase prices is the margin, which, in this case, is £400.

Here’s how it works: VAT = £400 × 16.67% = £66.67

Considerations for Businesses:

The VAT Margin Scheme offers businesses dealing in specific goods a simplified approach to VAT calculations, ensuring compliance while reducing administrative complexities. To ensure proper VAT treatment, businesses must be aware of exceptions and exceptional cases, especially when dealing with items like vehicles or goods traded internationally.

Detailed record-keeping and professional advice are crucial to successfully navigating this scheme and optimizing VAT management for your business.

How Do VAT Schemes in the UK Work?

Once registered for VAT, businesses can choose from different VAT schemes based on their specific circumstances, size, and preferences. These schemes include the Standard VAT Accounting Scheme, Flat Rate Scheme, Cash Accounting Scheme, Annual Accounting Scheme, Retail Scheme, and Margin Scheme, among others. Here’s how these VAT schemes work:

  • Under the Standard VAT Accounting Scheme, businesses calculate VAT by taking the difference between the VAT they’ve charged on their sales (output tax) and the VAT they’ve paid on their purchases (input tax). They then submit VAT returns and pay the difference to HMRC.

  • Different schemes may use alternative methods for VAT calculation. For instance, the flat rate scheme pays a fixed turnover percentage as VAT, while the cash accounting scheme accounts for VAT based on cash movements.

  • VAT-registered businesses must submit regular VAT returns to HMRC, typically every quarter. The return includes output tax, input tax, and the net VAT payable or reclaimable.

  • Businesses are responsible for making VAT payments to HMRC based on their VAT returns. This payment represents the difference between the output tax collected from customers and the input tax paid on purchases.

  • Once you make the payment, accurate record-keeping is essential for all VAT schemes. Businesses must maintain comprehensive records of their sales, purchases, and VAT transactions to ensure compliance with HMRC’s requirements.

VAT-registered businesses are expected to comply with VAT regulations, including the timely submission of VAT returns and payments. Compliance ensures that your business meets its legal obligations and avoids penalties.

Which VAT Scheme Should I Use?

VAT schemes in the UK offer businesses flexibility and options for managing their VAT obligations. Choosing a suitable scheme and adhering to its rules is crucial for accurate VAT calculation and timely submission, allowing businesses to maintain good financial health and meet their tax obligations.

When deciding which UK VAT scheme to choose, it’s advisable to consider the following:

  • Your Business Type: The nature of your business, including whether you sell goods, provide services, or operate in the retail sector, will influence your scheme choice.

  • Turnover: Your taxable turnover is critical in determining eligibility for specific schemes. Ensure you meet the turnover criteria for the scheme you’re considering.
    For example, you can choose a cash accounting scheme if our taxable turnover is £1.35 million or less and you want to account for VAT based on cash movements.
    When your taxable turnover is £150,000 or less (excluding VAT) and your business activities make you eligible for this scheme, you can choose the flat rate scheme to simplify VAT accounting with low input tax.

  • Cash Flow: Consider the impact of your chosen scheme on your cash flow. Some schemes, like the Cash Accounting Scheme, can help with cash flow management.

  • Administrative Ease: Evaluate the administrative requirements of each scheme. Some are designed to simplify record-keeping and reporting.

  • Professional Advice: Consult with a qualified accountant or tax advisor who can provide personalized guidance based on your specific business circumstances.

Ultimately, your business’s suitable VAT scheme will depend on your unique situation and goals. Careful consideration and professional advice can help you make an informed decision and meet your VAT obligations efficiently.


1. When do UK businesses need to sign up for VAT?

Answer: Businesses that make over £90,000 annually in the UK must sign up for VAT. As of right now, this is the amount that businesses need to know to meet the standards for VAT registration. However, they can voluntarily register for VAT if their turnover is below this amount.

2. How does the Flat Rate Scheme work, and who might benefit from it?

Answer: The Flat Rate Scheme enables companies to pay VAT as a fixed turnover percentage rather than computing the difference between input and output taxes. With less administrative work, it can make VAT accounting simpler for smaller companies.

3. What happens if a business fails to comply with VAT regulations or misses a submission deadline?

Answer: Non-compliance with VAT regulations or missing submission deadlines will lead to penalties. Businesses must meet their legal obligations, submit timely returns, and make accurate VAT payments to avoid financial consequences.


In summary, VAT schemes in the UK offer businesses a range of options to simplify their VAT accounting and reporting. Whether you’re a small retailer looking for a streamlined method or a larger enterprise managing complex transactions, there’s a scheme tailored to your needs.

By choosing the suitable VAT scheme, businesses can navigate their tax obligations more effectively and maintain sound financial health, contributing to their overall success in the UK’s business landscape.

Related Post