The difference between normal VAT accounting and flat rate VAT

June 26, 2012

As you know, if you’ve read my blog yesterday, I got very excited about VAT.  So here’s some more on VAT and the different ways of accounting for it.

If you have started off in business you don’t need to register for VAT until your sales hit £77,000.  Once this has happened, you have 4 choices:

1. Invoice accounting for VAT
2. Cash accounting for VAT
3. Flat rate VAT
4. Flat rate cash accounting for VAT

What do these mean?

1. Invoice accounting for VAT – this is the common way where you would add up all your VAT on your sales invoices (your output VAT) and add up all your VAT on your purchase invoices and receipts/expenses and then you deduct one from the other.  If the VAT on the sales invoices is higher than the purchase invoices/receipts/expenses – congratulations you are making a profit (probably*) and you have a VAT bill to pay.  If it is a negative number, you are due a VAT repayment (great) but your business is making a loss (probably*).  If you do this way, you can get away with accounting on spreadsheets but I would an accounting system on software.

2. Cash accounting for VAT – the same as 1. But you don’t look at the invoices; you just look at cash, the amount you have received from customers and the amount you paid out.  The advantage of this is that you only ever pay VAT over to HM Revenue & Customs that you have been paid from customers (although this is only a short term cash boost on the first VAT return that you do, it then unwinds itself), the disadvantage is that you definitely need decent software to do it properly and its easy to make a mistake.

3. Flat rate VAT – add up all your sales invoices GROSS (not net) and multiply it by a flat rate %.  You can find this % on the HM Revenue & Customs website – it depends on what sector you are in (you also get a 1% discount on the first year), ask me if you are unsure.  Advantage – very easy.  Disadvantage – you may pay more VAT as it doesn’t take into account expenses.

4. Flat rate cash accounting for VAT.  Same as 3, you just add up the cash you have received NOT the sales invoices.

Tomorrow – which is best?

*If you are in a business sector with more complicated VAT rules, receiving a rebate doesn’t necessarily mean you are making a loss.


0113 337 2130

Want to Know More About Our Specialist Small Business Accounting Services?

Get Your Free, No Obligation Quote from Our Award-Winning Accountants Today!

Pin It on Pinterest