Understanding VAT for small businesses is a top concern for those operating in the UK and choosing a VAT Scheme is a crucial decision and essential for the future growth of the business. Although there are different VAT Schemes in the UK, in this article we are going to primarily focus on the VAT flat rate scheme, VAT cash accounting scheme, and How Pharmacies account for VAT.

Flat Rate Scheme

With the Flat Rate Scheme, you pay a fixed rate of VAT to HMRC. This flat rate scheme is designed to simplify the VAT process and all associated accounting and administration by prompting businesses to pay a flat rate of VAT. As far as your own invoices are concerned, you will charge VAT as usual and clients won’t notice any change. However, the percentage you pay is set by HMRC and varies according to your industry. For example, IT contractors will pay a flat rate VAT at 14.5 percent. This means you’ll still charge your clients VAT at 20%, but you’ll only pay 14.5% of the invoice amount to HMRC - you keep the difference between what you charge your customers and pay to HMRC. If your business has a low level of outgoings, you may stand to benefit financially from becoming VAT-registered, and in particular, take advantage of the Flat Rate Scheme. As a typical rule, the more you spend on materials and goods, the lower your flat rate percentage will be.

Under the scheme you cannot reclaim the VAT on your purchases - except for certain capital assets over £2,000 thus the flat rate will always be lower than the regular 20% rate as compensation. If joining the scheme is for you, you must meet the following criteria:

1]Your business is VAT-registered and;

2]You expect your taxable turnover — the total of everything sold that is not VAT exempt — to be £150,000 or less (excluding VAT) in the next 12 months

Cash Accounting Scheme

With the Cash Accounting Scheme, you pay VAT on your sales when your customers pay you and reclaim VAT on your purchases when you have paid your supplier. Cash accounting enables a business to account for and pay VAT on the basis of cash received and paid rather than on the basis of invoices issued and received.

Cash accounting can bring a whole range of benefits to a business.

(1) It makes calculating VAT much simpler – most business owners find it easier to keep track of payments and receipts than they do invoices.

(2) Cashflow – it has a positive impact on cash flow because you’re not having to pay the VAT to HMRC before you’ve even been paid by your customer.

(3) Immediate bad debt relief – if no payment is received, no VAT is paid to the HMRC.

You can use cash accounting if your business is registered for VAT and your estimated taxable turnover is £1.35 million or less in the next 12 months. Taxable turnover is the total of everything sold that is not VAT exempt. On the other hand, you cannot use cash accounting if:

 you use the VAT Flat Rate Scheme - instead, the Flat Rate Scheme has its own cash-based turnover method

 you’re not up to date with your VAT Returns or payments

 you’ve committed a VAT offence in the last 12 months, for example VAT evasion

How Pharmacies account for VAT

Things can get a bit complicated for the schemes and the rules governing what type of services a pharmacy provides. Most pharmacists we deal with use the point-of-sale scheme, where they identify and record the VAT at the time of sale. Others prefer to use the apportionment scheme, but this can be risky if you buy standard-rated lines and sell them as zero-rated products. If your pharmacy provides medical treatment which is exempt from VAT and if you charge the patient for bandages, drugs, medicines or prostheses, it will be exempt from VAT.

Any items that are separate from the treatment, such as malaria tablets which are sold over the counter for the buyer to consume, will not be exempt from VAT and are normally standard-rated. As with most things VAT, some products are standard-rated and others are zero-rated in certain circumstances.

A VAT-registered pharmacy can be partly exempt from VAT if it makes, or intends to make, both taxable and exempt supplies and incurs tax on costs that relate to both. It is also possible for partially-exempt pharmacies to recover VAT incurred on business overheads and purchases. As part of that calculation distinguishing between supplies and purchases and working out which of your supplies are taxable and which are exempt, enables your pharmacy business to potentially recover some VAT.

While you don’t have to register for VAT unless your taxable supplies exceed the £85,000 VAT-registration threshold, you may choose to voluntarily register to recover some input tax. VAT periods in the UK are normally quarterly, however, you may request a different VAT term. One VAT strategy to optimize cash flow in your organization is to opt for Monthly VAT returns – for example, a pharmacy that routinely reclaims VAT from HMRC may benefit from submitting monthly VAT returns. Monthly VAT returns should be submitted as soon as possible after the end of the month to encourage HMRC to process refunds quickly. To make the change to monthly returns you can either apply online to change your registration details or fill in form VAT 484 and send it to the address on the form.

If you want to know more about different VAT Schemes and to help you identify which one is more appropriate for your business or not, you may always reach out to Cheylesmore Accountants, we would be happy to serve you on your needs.