Jun 11, 2025
VAT Schemes for UK Businesses: A Simple Guide to Flat Rate, Annual Accounting and Cash Accounting
Choosing the Right VAT Scheme
Not all VAT-registered businesses need to use the standard VAT accounting method. HMRC offers alternative schemes that can make VAT simpler, improve cashflow, or reduce admin — but choosing the right one is crucial.
This article explains the main VAT schemes available to UK businesses — Flat Rate, Annual Accounting, and Cash Accounting — and highlights the advantages and risks of each.
What Are VAT Schemes?
VAT schemes are optional ways of calculating and reporting VAT designed to:
Reduce administrative burden for small and medium businesses.
Align VAT payments more closely with cashflow.
Simplify calculations for specific industries.
Not every business is eligible, and choosing the wrong scheme can sometimes cost more than it saves.
The Flat Rate Scheme
How It Works
You charge VAT at the standard rate (usually 20%) on sales.
Instead of reclaiming input VAT, you pay HMRC a fixed percentage of your gross turnover.
The percentage depends on your industry.
👉 Example: A consultant with £50,000 turnover pays 14.5% of gross sales (£7,250) to HMRC, instead of working out input vs output VAT.
Advantages
Simpler VAT reporting.
Less admin, fewer records to keep.
In some industries, it can reduce VAT liability.
Risks
You can’t reclaim VAT on most purchases (only large capital assets over £2,000).
If your costs are high, this scheme can cost more than standard VAT.
The Annual Accounting Scheme
How It Works
File just one VAT return per year instead of quarterly.
Pay VAT in advance via instalments (usually nine monthly or three quarterly payments).
Final balance is adjusted when the annual return is submitted.
Advantages
Fewer VAT returns to prepare.
Easier budgeting through predictable instalments.
Risks
If turnover suddenly increases, you may underpay during the year and face a large balancing payment.
Not suitable for businesses wanting regular VAT repayments (e.g., with high input VAT).
The Cash Accounting Scheme
How It Works
You only pay VAT to HMRC when your customers pay you (not when you issue invoices).
Similarly, you reclaim VAT only when you pay your suppliers.
Advantages
Helps cashflow, especially if clients take time to pay.
Reduces risk of paying VAT on unpaid invoices.
Risks
You can’t reclaim VAT on purchases until you’ve paid suppliers.
Not always suitable for businesses with fast turnover or upfront supplier costs.
Choosing the Right Scheme
The right VAT scheme depends on:
Your industry and cost structure.
The speed at which clients pay you.
Whether you prefer simplicity or flexibility.
👉 A professional service firm with low costs may benefit from Flat Rate.
👉 A seasonal business may prefer Annual Accounting.
👉 A business with late-paying clients may prefer Cash Accounting.
How Wexley & Associates Helps
At Wexley & Associates, we:
Assess eligibility for different VAT schemes.
Run comparisons to see which scheme reduces liabilities.
Handle all HMRC registrations and compliance.
Review schemes regularly to ensure ongoing suitability.
With expert advice, clients save money, simplify admin, and avoid pitfalls.
Get Clarity on Your VAT Obligations
VAT doesn’t need to be one-size-fits-all. Choosing the right scheme could save you thousands and make life easier.
Contact Wexley & Associates today to find the best VAT scheme for your business.
