Taking the Strain Out of VAT

Efficient ways to pay your VAT

Under normal circumstances, most VAT registered businesses have to send in quarterly VAT returns which must be done electronically. Payment of VAT should be made electronically either by Direct Debit, Faster Payments by internet/telephone banking, CHAPs, BACs, Direct Credit, Online debit/credit card using BillPay and payment by Bank Giro Credit.

Direct Debit

Setting up and paying your VAT by Direct Debit is certainly the best way to ensure that your business does not miss a payment. As payments are debited automatically from the business bank account, then all you have to concern yourself with is ensuring that the VAT return is filed on time.

For those businesses that are disciplined enough to do so, an alternative would be to calculate the amount of VAT owing at the end of each month and place that money on deposit thereby earning a little interest before it is then paid over to HMRC. It is important however that payment dates are not missed. Payments must be received by HMRC seven days after the end of the month following the end of the VAT period. For example, if a business is filing a VAT return for the period 31st March, then HMRC must have the return and payment by 7th May.

As interest rates are currently not that favourable, many businesses may consider this approach unattractive.

Cash accounting

Businesses with a turnover of not more than £1.35 million can use the cash accounting scheme as long as they are up-to-date with their VAT obligations.

Under this system, output tax (VAT on sales) does not have to be accounted for until the cash is received. Conversely, input tax (VAT on expenditure) can only be claimed once the invoice has been paid.

HMRC can refuse entry to the scheme or withdraw it, if they deem it necessary to protect tax revenue.

A business can leave the scheme voluntarily at the end of any tax period. In these circumstances, the business may either account for all outstanding VAT in that period or opt to account for it over a period of six months.

Annual accounting

Just like cash accounting, entry level for this scheme is a turnover of less than £1.35 million.

VAT is paid in nine monthly instalments based on the previous year’s liability. Only one VAT return is required to be filed, within two months after the end of the year when balancing payment is also due, unless there is a refund of VAT due. As an alternative to paying monthly, payments on account of VAT can be made quarterly.

If a business knows that its VAT liability is going to be much more or less than the estimated amount, then they can ask HMRC to adjust the level of instalments, so as to avoid a large bill at the end of the year or significantly overpaying.

With the imminent introduction of the limited trader rate of 16.5% under the Flat Rate Scheme, (FRS) there will be contractors considering whether it is still beneficial to remain in the FRS. Either of the two schemes discussed may provide a suitable alternative.