Which VAT method should you go for?
Author: Russell SmithJune 28, 2012
So here it is….the last part in my VAT trilogy. I’ve enjoyed writing it, I hope you’ve enjoyed reading it. To all you VAT specialists out there, feel free to comment on the blog and after, let’s get together and have a VAT party where we can discuss all the oddities of the VAT system.
Yesterday, I looked at the different VAT methods and which one you should choose for a business. Before I give you the answer here’s some things to remember.
The different methods of VAT are not designed to save you VAT they are designed to make things easier (in the case of cash accounting, easier on the cash, in the case of flat rate scheme, easier on the administration). However, that doesn’t mean that all the methods will give you the same VAT bill, they won’t, and if one is lower than another it is just by accident.
So here is the answer….
Cash accounting is better than normal VAT accounting from a cash flow perspective but this is only for the first VAT bill. After that, your VAT bills are the same and you have the increased accountancy time of figuring out your receipts/payments as opposed to your invoices/expense receipts (a whizzy piece of accounting software can do this for you but this method is easier to make mistakes on). If a business is on normal VAT accounting and they are really struggling with their cash flow, changing it to cash accounting can have a big positive cash flow impact (but only once).
Flat rate COULD be a lower VAT bill than normal VAT accounting or cash accounting but if all depends on the rate you are given by HM Revenue & Customs (if you want to know the rate for your business – give me a call on 0113 394 4616). The 1% discount does give you a boost but the difference between normal VAT accounting and flat rate VAT could be higher one quarter and lower the next depending on your expenses. Flat rate is bad for businesses with lots of VATable expenses or for businesses that have bought a great deal of equipment at the beginning of the business. By the way, you can only apply for Flat rate VAT if your annual turnover is less than £150,000.