VAT focus: The three VAT simplification schemes for SMEs

There are three VAT schemes – the flat rate scheme (FRS); the cash accounting scheme; and the annual accounting scheme – which are of particular benefit to SMEs in the right circumstances. Under the FRS, the VAT liability is calculated as a single fixed percentage applied only to a business’s VAT-inclusive turnover; however, the correct percentage for the FRS can be difficult to determine. The cash accounting scheme is a good way to improve cashflow for SMEs; however, care must be exercised for businesses expecting to make input tax claims, for which the cash accounting scheme can cause a cashflow disadvantage. The annual accounting scheme can also be beneficial, though businesses must be disciplined in their completion of the annual VAT return and should also consider the instalments payable, which can be particularly onerous if set too high.