After I had written my blog last week my little cat (Rosie) had a scrape with a car – which luckily she survived – and she is struggling now with a bruised jaw and bad leg. It got me thinking about what happens in an owner-managed business if the owner is ill or unable to work for other reasons. Personally I don’t have critical illness cover (sorry to all the financial advisors out there I don’t see it as value for money) but I do have a reserve account with the equivalent of 3 months’ turnover so I could afford to bring someone in to cover my work and still pay myself.
I promised to cover VAT schemes today so perhaps I’ll come back to problems for small businesses in the future.
In last week’s blog I looked at the reasons for VAT registration. As well as considering this there are schemes available from HMRC which can make it an attractive option.
- Cash Accounting
Cash accounting is available to all “small” businesses (turnover below £1.35m) and means you can pay the VAT based on your cashflow rather than the date on your sales invoices and purchase invoices. This is extremely helpful if your customers are slow to pay but you pay your suppliers quickly, it will improve your cashflow. If though it’s the other way around you would probably be better off sticking to “accruals” accounting using the date on the paperwork.
You don’t have to apply for this, just start using this method if you prefer it.
- Flat Rate Scheme
The Flat Rate scheme means you pay VAT as a percentage of total sales, rather than having to calculate the VAT “properly”. Each type of business has its own percentage, be careful to choose the right one. It is meant to simplify VAT by only needing to add up your sales and pay the correct percentage each quarter. It works the best for businesses who have a small amount of VATable purchases, such as Consultants or Service Companies.
You have to apply for the scheme via HMRC Application Form and have it approved.
BEWARE it is based on GROSS sales including VAT not NET sales. This can leave you with a nasty shock if you get it wrong. Also, keep an eye on whether it is advantageous to be in the scheme, and only use it if you are saving money.
- Annual Accounting
This works a bit like utility bills. Your Annual bill is estimated, and paid in monthly instalments. You only then need to complete one return at the end of the year and either make a balancing payment or receive a refund.
Personally I’m not a huge fan of this scheme. For most small businesses it’s very difficult to estimate your VAT bill accurately, and I wouldn’t want a huge bill at the end of the year, or to have overpaid either.
This scheme also needs to be applied for. Write to HMRC using this application form.
There are other schemes for specific businesses, but I think these are the main 3 to be concerned with. If you don’t know which scheme is for you, ask your Accountant!
Picture courtesy of Paul Anderson, taken from Flickr