Value Added Tax (VAT) is a consumption tax levied on the end user of a product or service by the government.  It affects VAT registered businesses in that they act as the tax collector on behalf of HMRC.


VAT has no effect on the profit of your business, only on its cash flows


Any business making a ‘taxable supply’ can register for VAT, but those with revenue in excess of £85k per annum must register. Once you register, the company or business must charge customers VAT on top of the selling price. Businesses then report and pay the VAT they have collected to HMRC, usually quarterly – although monthly and annual schemes are also available.

The advantage of registering for VAT is that the company or business can claim back the VAT suffered on the purchases it makes, with a few exceptions for things such as client entertaining.

The above hopefully makes VAT seem straightforward, however there is plenty of complexity to catch out the unwary.  There is also the opportunity to use different VAT schemes to support your business cash flow demands. It is far from a “one size fits all” tax like corporation tax.


Different VAT schemes

There are two main ways in which VAT schemes can differ: reporting period, and cash/accruals basis.

Reporting period:

When you first register for VAT the default reporting period is quarterly. This means for a typical business that you collect and suffer VAT on sales and purchases respectively for three months.  At the end of the three months you sum up and net off the VAT collected and paid and pay the balance to HMRC (within one month and seven days of the quarter end).

For those in a reclaim position who would typically be either startup businesses, or those with a zero rated supply (such as grocers or children’s clothing retailer), it may make better cash flow sense to report and reclaim VAT monthly.

Cash/accruals basis:

Under the “accruals” scheme, you report the VAT as you receive or submit your invoices.  Under the “cash” scheme, VAT is only reported (and paid) on invoices (both sales and purchases) once they have been paid.  For established businesses, there is unlikely to be a significant difference between the schemes.  However for small/start-up businesses the cash scheme can be a good boost for the working capital cycle, as it prevents large VAT bills falling due (before the customers have settled their debts with the company).