VAT records, schemes and communication
Finance Act 2025 · 2025/26
1 Records and late registration
Daffodil Ltd only sells goods, and at present issues sales invoices that show (1) the invoice date and invoice number, (2) the type of supply, (3) the quantity and a description of the goods supplied, (4) Daffodil Ltd’s name and address, and (5) the name and address of the customer. The company does not offer any discount for prompt payment.
Daffodil Ltd wants to know the additional information that it will have to show on its sales invoices in order that these are valid for VAT purposes.
The following information is required:
the VAT registration number;
the tax point;
the rate of VAT for each supply;
the VAT exclusive amount for each supply;
the total VAT exclusive amount;
the amount of VAT payable.
Keep sales/purchase invoices, credit notes, cash/bank records, the VAT account and return/payment evidence. Records are normally retained for six years. Keep required information digitally under Making Tax Digital unless exempt.
Late registration can create a failure-to-notify penalty based on unpaid VAT and behaviour/disclosure, using the supplied standard percentages. A late registration also requires the VAT due from the correct effective date to be accounted for.
The new VAT late-filing/late-payment points regime is not examined in FTX.
2 The Cash Accounting and Annual Accounting Schemes
The cash accounting and annual accounting schemes are both optional schemes that are available to small businesses.
The cash accounting scheme enables a trader to account for output VAT on a cash received/cash paid basis (the tax point is ignored).
The scheme will normally be beneficial where an extended period of credit is taken by customers, and it also results in automatic bad debt relief. The disadvantage is that input VAT on purchases/expenses will only be recovered when payment is made to the supplier.
Violet Ltd gives its customers a 30 day credit period, but pays for most of its expenses in cash. Violet Ltd wants to know what conditions must be satisfied before it will be permitted to use the cash accounting scheme, and the implications of using the scheme.
(1) Violet Ltd will be able to operate the cash accounting scheme provided its expected taxable turnover for the next 12 months does not exceed £1,350,000.
(2) In addition, the company must be up to date with its VAT returns and VAT payments.
(3) The scheme will result in the tax point of a supply becoming the date that payment is received from customers.
(4) This will delay the payment of output tax, and also provides for automatic bad debt relief should a customer not pay.
(5) Since Violet Ltd pays in cash for most of its expenses, the company’s recovery of input VAT will not be affected.
(6) Violet Ltd can stay in the scheme until annual taxable turnover exceeds £1,600,000
The advantage of the annual accounting scheme is mainly administrative, since a trader only has to make one VAT return each year. Payments on account of the annual VAT liability are normally required. It will also allow easier budgeting for cashflow.
Crocus Ltd wants to know the advantages of the annual accounting scheme, and when it will be permitted to join. The company’s annual turnover is £450,000.
(1) Crocus Ltd can apply to use the annual accounting scheme provided its expected taxable turnover for the next 12 months does not exceed £1,350,000.
(2) In addition the company must be up to date with its VAT returns and payments.
(3) Under the scheme only one VAT return is submitted each year.
(4) Nine monthly payments are made on account, each being 10% of the previous year’s VAT liability, the payments being due at the end of months 4 to 12 of the VAT year. Crocus Ltd may choose three quarterly payments on account instead, each being 25% of the previous year's VAT liability, at the end of months 4, 7 and 10 of the VAT year. In both cases any balancing payment is made along with the submission of the VAT return, which is due within two months of the end of the VAT year.
(5) Crocus Ltd can stay in the scheme until annual taxable turnover exceeds £1,600,000.
3 Flat rate scheme
The flat rate scheme is optional. It simplifies the way in which small businesses calculate their VAT liability.
The scheme can be used if the expected taxable turnover for the next 12 months does not exceed £150,000. The business can stay in the scheme as long as turnover is ≤ £230,000.
Under the flat rate scheme, a business calculates its VAT liability by simply applying a flat rate percentage (given by HMRC based on trade sector) to the total VAT inclusive turnover including any exempt supplies. This removes the need to calculate and record output VAT and input VAT.
The flat rate percentage is applied to the total VAT inclusive turnover figure, with no input VAT being recovered.
The percentage varies according to the type of trade that the business is involved in, and will be given to you in the examination.
A higher flat rate of 16.5% has been introduced for businesses with either no, or only a small amount of purchases of goods (known as 'limited cost traders').
Students will not be expected to know where this rate is applicable but will need to know how to use it and identify whether the flat rate scheme is worthwhile, which is most unlikely in these circumstances - if a business makes taxable supplies of £100,000 (excluding VAT) then it would normally have to account for output VAT of £20,000 and then reduce it by any recoverable input VAT. If, however the flat rate scheme was adopted then irrespective of the amount of input VAT incurred the trader must make a payment of (£100,000 x 120% = £120,000 x 16.5% = £19,800) with no input VAT being recovered.
Where a supply is made to another VAT registered business and a VAT invoice is issued, the invoice will show the normal rate of VAT.
(a) Snowdrop Ltd has annual sales of £120,000, all of which are standard rated and are to the general public. The company’s standard rated expenses are £6,000 p.a. These figures are inclusive of VAT. The relevant flat rate percentage for Snowdrop Ltd’s trade is 15%. Using the normal basis of calculating its VAT liability, Snowdrop Ltd will have to pay VAT as follows:
£ | ||
Output VAT (£120,000 × 20/120) | 20,000 | |
Input VAT (£6,000 × 20/120) | (1,000) | |
VAT payable | 19,000 |
If Snowdrop Ltd uses the flat rate scheme then it will pay VAT of £18,000 (£120,000 × 15%). There is a VAT saving of £1,000 (£19,000 – £18,000) in addition to the simplified administration. As none of Snowdrop Ltd’s customers are VAT registered, there will be no need to issue VAT invoices.
(b) Primrose Ltd has annual sales of £96,000, of which 50% are standard rated and 50% are zero rated. All of the company’s sales are to VAT registered businesses. The company’s standard rated expenses are £30,000 p.a. These figures are exclusive of VAT. The relevant flat rate percentage for Primrose Ltd’s trade is 6%. Using the normal basis of calculating its VAT liability, Primrose Ltd will have to pay VAT as follows:
£ | ||
Output VAT (£96,000 x 50% x 20%) | 9,600 | |
Input VAT (£30,000 x 20%) | (6,000) | |
VAT payable | 3,600 |
If Primrose Ltd uses the flat rate scheme then it will pay VAT as follows:
£ | ||
VAT inclusive turnover: | ||
- Standard rated sales: £96,000 x 50% x 120% | 57,600 | |
- zero rated sales: £96,000 x 50% | 48,000 | |
Total VAT inclusive turnover | 105,600 |
£105,600 x 6% = £6,336.
Although the flat rate scheme will result in simplified administration, it is not beneficial as additional VAT of £2,736 (£6,336 – £3,600) is payable and Primrose Ltd would still have to issue VAT invoices as its customers are registered for VAT.
Scheme | Key use / limits |
Cash accounting | Join if expected taxable turnover≤£1.35 million; normally leave above £1.6 million. Output/input VAT follows receipts/payments. |
Annual accounting | Join if expected taxable turnover≤£1.35 million; normally leave above £1.6 million. One annual return, regular advance payments, and final balance. |
Flat rate | Join if taxable turnover≤£150,000 VAT-exclusive; normally leave if VAT-inclusive total income exceeds £230,000. Apply supplied rate to VAT-inclusive turnover; normally no input VAT claim. |
Flat-rate businesses still issue ordinary VAT invoices and keep required records. A limited-cost rate may be supplied. Eligible single capital-goods purchases of £2,000 or more VAT-inclusive can have a special input VAT claim; routine expenses do not. The second-hand goods, capital-goods and retailer schemes are not examined in FTX.
Amir has net standard-rated sales £40,000, net purchases £10,000 and a supplied flat rate 12%. Compare ordinary VAT with flat rate; assume no special capital-goods claim.
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4 Managers, systems and HMRC
Tell the manager the VAT payable/refund, period and due date, and when cash is expected. Update the cash forecast; net sales income is not all available cash if VAT must be remitted.
When legislation or the VAT rate changes, check invoice templates, tax codes, product classifications, credit notes and return software. Train staff and test sample transactions; communicate the effective date and retain evidence.
For HMRC guidance identify the business/VAT number, tax period, transaction facts, amounts and the exact question. Use the official channel, keep a record of the response, and confirm any action/deadline. Use clear professional language rather than unsupported assumptions.
Bola Ltd expects £8,000 cash before the VAT payment date. The forecast omitted a £6,000 VAT liability. State the revised cash and what to communicate.
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Chika discovers uncertainty about a supply’s VAT classification. What information should her request for HMRC guidance contain?
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A manager asks how a future VAT rate change would affect the business’s systems. State the work required, without computing a return spanning the change.