The effect of special schemes: formula sheet

Key formulas

Joining limit

Expected taxable turnover (excl. VAT) in next 12 months ≤ £1,350,000

Test it on a forward-looking basis. The cash accounting limits are not given in the tax tables, so you must memorise them.

Leaving limit

Must leave when taxable turnover exceeds £1,600,000

The leaving limit is higher than the joining limit, so a growing business is not forced out at once.

Output VAT on receipts

VAT on a receipt = gross receipt × 20/120 (standard rate)

Use the cash received in the period, not invoices issued.

Input VAT on payments

VAT on a payment = gross payment × 20/120 (standard rate)

Use the cash paid in the period, not invoices received.

VAT payable for the period

Output VAT on receipts − input VAT on payments

A negative result is a repayment due from HMRC.

Standard rate and registration limits

Standard rate 20%; registration limit £90,000; deregistration limit £88,000

These are separate from the scheme limits. Do not mix them up.

Entry limit

Expected taxable turnover (excluding VAT) for next 12 months ≤ £1,350,000

Business must also be up to date with its VAT returns. Learn this limit, as it is not in the tax tables.

Leaving limit

Must leave when taxable turnover > £1,600,000

Applies to turnover in the annual accounting period. Learn this limit as well.

Monthly interim payments

9 × (10% × previous year's VAT liability), paid in months 4 to 12

Normally paid by direct debit, by the end of each month.

Quarterly interim payments

3 × (25% × previous year's VAT liability), paid in months 4, 7 and 10

Alternative to monthly payments. The total is 75% of last year's liability.

Balancing payment

Actual VAT liability for the year − interim payments made

A negative answer means a repayment is due to the business.

Deadline

Annual return and balancing payment due within 2 months of the end of the annual accounting period

Example: year end 31 March, due 31 May.

VAT rate

Standard rate 20%

From the tables ACCA provides. Registration limit is £90,000 and deregistration limit is £88,000.

Flat rate VAT payable

VAT payable = VAT-inclusive turnover × flat rate %

Turnover includes standard-rated sales plus their VAT, and also zero-rated and exempt sales.

VAT-inclusive turnover for standard-rated sales

Net sales × 120% (standard rate of 20%)

Gross up net sales before applying the flat rate.

First-year discount

Flat rate in first year = normal flat rate − 1%

Applies until the day before the first anniversary of VAT registration.

Joining limit

Expected taxable turnover (excluding VAT) in next 12 months ≤ £150,000

Check the limit the question gives. Do not confuse it with the £90,000 registration limit.

Leaving limit

Leave if VAT-inclusive total income in the year exceeds £230,000

The business may also leave voluntarily at any time.

Input VAT exception

Reclaim input VAT only on a single capital asset costing £2,000 or more including VAT

All other input VAT is not reclaimed.

Scheme comparison

Benefit of scheme = (output tax − input tax) − flat rate VAT

A positive answer means the scheme saves money.

Cash accounting: entry and exit

Join if expected taxable turnover ≤ £1,350,000; must leave if turnover exceeds £1,600,000

Output tax is accounted for on receipt, input tax on payment. Bad debt relief is automatic. Learn these limits as the ACCA rules; they are not in the rates table.

Annual accounting: entry and exit

Join if expected taxable turnover ≤ £1,350,000; must leave if turnover exceeds £1,600,000

One return a year, due within two months of the year end. You must be up to date with VAT returns to join.

Annual accounting: payments

Nine monthly payments of 10% of prior year VAT liability (months 4 to 12); balancing payment = actual liability − interim payments

The balancing payment is due with the annual return, within two months of the year end. An alternative is three quarterly payments of 25%.

Flat rate scheme: entry and exit

Join if expected taxable turnover (excluding VAT) ≤ £150,000; must leave if VAT-inclusive turnover exceeds £230,000

Know the limits as the ACCA rules. They are not in the rates table.

Flat rate scheme: VAT payable

VAT payable = flat rate % × VAT-inclusive turnover

Turnover includes standard-rated, zero-rated and exempt supplies, all at their VAT-inclusive value. Input tax is generally not recovered, except on capital expenditure over £2,000 including VAT. A 1% reduction in the flat rate applies in the first year of VAT registration.

VAT registration limits (for context)

Registration £90,000; deregistration £88,000; standard rate 20%

These come from the ACCA rates table. Schemes apply only to VAT-registered traders.

Quick revision

• The standard VAT rate is 20% and the registration limit is £90,000. Both are in the tax tables.
• Cash accounting: output VAT on cash received, input VAT on cash paid.
• Cash accounting gives automatic bad debt relief, because VAT is never paid on a sale that is not paid for.
• Cash accounting helps most where customers pay late. It can hurt where the business is regularly in a VAT repayment position, or pays suppliers late, because input VAT is only reclaimed when it pays. It gives no advantage if customers pay promptly.
• Annual accounting: one VAT return a year, with interim payments in the year based on the previous year's liability.
• Annual accounting: the balancing payment and the annual return are due after the year end, within the time limit you have learned.
• Annual accounting helps with admin and budgeting, but a growing business may overpay interim amounts and a shrinking one may face a large balancing payment.
• Flat rate scheme: VAT payable = flat rate percentage × VAT-inclusive turnover.
• Flat rate scheme: the business generally cannot reclaim input VAT, apart from limited capital purchases above the set threshold.
• Flat rate scheme: there is a reduction in the percentage in the first year of VAT registration, and a higher percentage applies to limited cost traders.
• The flat rate scheme is best for a business with low input VAT. It can cost more if the business buys a lot of standard-rated goods.
• Always check eligibility and exit limits before advising on a scheme.

Common mistakes

• Using invoice dates instead of payment dates. Fix: Under the scheme, only the date money moves matters. Mark each item as cash or not cash before calculating.
• Mixing up the joining limit and the leaving limit. Fix: Remember that you join at £1,350,000 or less of expected turnover, and leave when turnover exceeds £1,600,000. Joining is forward-looking.
• Basing the interim payments on the current year's VAT liability. Fix: Always use the previous year's liability. The current year's figure only appears in the balancing payment.
• Paying 10% for twelve months, or putting the payments in months 1 to 9. Fix: Nine payments, in months 4 to 12. The first three months have no payment. Quarterly payments fall in months 4, 7 and 10.
• Applying the flat rate to net sales instead of VAT-inclusive turnover. Fix: Always gross up standard-rated sales by 120% first. The flat rate is designed to work on the gross figure.
• Leaving out zero-rated and exempt sales from turnover. Fix: All income of the business is in the turnover figure, including zero-rated and exempt supplies.
• Applying the flat rate percentage to turnover excluding VAT. Fix: Gross up first. Standard-rated net sales × 1.2, then multiply by the flat rate percentage. Include zero-rated and exempt sales at face value.
• Deducting input tax under the flat rate scheme. Fix: Flat rate payable is just the percentage times VAT-inclusive turnover. The only usual exception is capital expenditure over £2,000 including VAT.

Exam tips

• Do the limit test first. Many objective questions only test whether you know £1,350,000 to join and £1,600,000 to leave.
• Check whether figures include VAT. Use 1/6 for gross figures and 20% for net ones.
• In Section C or an advice question, give both an advantage and a disadvantage, and link each to the facts: how fast customers pay and how fast the business pays suppliers.
• Watch for hire purchase, credit sale or conditional sale supplies, which are outside the scheme.
• Write your workings in two columns, cash received and cash paid. Objective answers are all or nothing, so one wrong sign costs the whole mark.
• Write the limits £1,350,000 and £1,600,000 at the start of your answer sheet. They are not in the tax tables, and OT questions on eligibility test them directly.
• In an OT case, read which payment pattern is stated before calculating. Nine at 10% and three at 25% give different totals.
• In written questions, show the sum of interims separately from the balancing payment. Method marks go to clear workings.