Are you using the best scheme for your VAT?

10 September 2025 | Mrge_Acontants

Value Added Tax (VAT) is something sole traders and companies must charge once their turnover exceeds £90,000 in a rolling 12-month period, or if they will exceed this amount within a three-month period. At this point, you are obliged to register for VAT with HMRC.

You can also choose to register for VAT before this, if you prefer, and it could be useful if, for example, you buy a lot of goods or services that charge VAT, as you can reclaim this once you are registered.

However, there are various schemes you can register for, so make sure you choose the one that will be best for you, reduce your admin, and increase the benefits for you and your business.

What are the different VAT schemes?

There are several different VAT schemes available to companies and sole traders, and which one you should use will depend on several things, such as what you or your company’s annual turnover is, and what sector your business is in.

Cash Accounting Scheme

The Cash Accounting Scheme is, perhaps, one of the easiest for companies to use, as you pay your VAT once your customer pays your invoice, and you reclaim any VAT you have paid on relevant goods and services.

To join this scheme, your turnover must be below £1.35m a year, but you must leave it if your turnover breaks the £1.6m per year barrier.

Annual Accounting Scheme

In most VAT schemes, companies or traders need to file their returns four times a year, every quarter. But with the Annual Accounting Scheme, you file your return once a year, which significantly reduces your administration.

However, if you use this scheme, you would only be able to reclaim your VAT on purchases once a year, so if you need to reclaim a lot of VAT, or you want to get more regular rebates, this wouldn’t be good for you. Conversely, you would only have to pay your VAT bill once a year, which for some could improve cashflow.

Again, to qualify for this scheme, you need to be turning over less than £1.35m a year, and again you will need to leave the scheme if your turnover goes above £1.6m a year.

Flat Rate Scheme

The Flat Rate Scheme, as the name suggests, means you will pay a single rate of VAT, which is determined by the industry you work in, and how much you spend on goods. You still charge VAT on your invoices at 20%, but you don’t need to work out how much VAT you have charged and can reclaim.

If you don’t have many vatable costs, essentially less than 2% of your VAT-inclusive turnover, or less than £1,000 a year, then HMRC classes you as a “limited cost trader”. This means no matter what sector your business is in, you must pay a flat rate of 16.5%. This is to make sure businesses don’t get too much benefit from the Flat Rate Scheme.

You can calculate if you need to pay the higher rate and work out which goods count as costs, via the link on Gov.uk. To see what the Flat Rate Scheme VAT is for your industry, you can check the table on Gov.uk.

To join the Flat Rate Scheme, you would need to have a turnover below £150,000 a year, and if you opt for this scheme, then you can’t reclaim VAT on items you purchase, except for certain capital assets over £2,000.

Example

You bill a customer for £1,000, adding VAT at 20% to make £1,200 in total.

You’re a photographer, so the VAT flat rate for your business is 11%.

Your flat rate payment will be 11% of £1,200, or £132.

VAT inclusive turnover is different from standard VAT turnover. As well as business income (such as from sales), it includes the VAT paid on that income.

Calculating two flat rates

 The first calculation should start from day one of your accounting period to the last day of that flat rate. The second should start from the date of the new flat rate to the end of your accounting period.

Source: HMRC

If you’re not sure which scheme would be best for you, or whether you should change which scheme you’re in, then speak to your accountant for advice.

We can help you

Choosing the right VAT scheme can make a big difference to your business and the amount of admin you need to do, and if you’re not sure which scheme would be right for you, then please contact us and we will do everything we can to assist you.