VAT – Is your firm using the best scheme?
There are several VAT schemes which your business could benefit from.
In contrast to the standard VAT accounting scheme where you pay VAT on bills issued, and reclaim VAT on supplier invoices received, there are alternative schemes that might work better for your Practice:
The Flat Rate VAT Scheme
This scheme can be used if your firm’s estimated VAT taxable turnover (net of VAT) is less than £150,000 per year. Using this scheme allows law firms to pay 14.5% of their gross turnover (profit costs plus VAT) over to HMRC rather than the standard 20%. However on the down side, you are not permitted to reclaim any input VAT on expenses or purchases except for certain capital assets over £2,000 in value.
The main advantage of this scheme is that administratively it is fairly simple to calculate what VAT is due to be paid to HMRC each VAT return period. But also, if your firm’s main expenses are exempt from VAT (ie salaries/ insurance etc.), there are generally savings to be made using this scheme. Also, if you are in your first year as a VAT-registered business, you can reduce the VAT flat rate percentage to be paid by 1% for that year.
The Cash Accounting VAT scheme
This scheme is specifically designed to deal with cash flow issues, so would be useful where your clients are slow payers.
The scheme can be used if your firm’s estimated VAT taxable turnover (net of VAT) is less than £1.35m per year. Using this scheme allows you to declare the VAT on your fees only when your clients pay you; and reclaim VAT on your expenses/ purchases only when you have paid your suppliers.
The main advantage of this scheme is that you do not have to pay VAT to HMRC until you have received payment from your clients and therefore, if your client never pays you, you will never have to pay the VAT on that bad debt as long as your firm continues to use the cash accounting scheme.
The Standard Accounting VAT scheme
If your firms VAT taxable turnover is more than £1.35m per year you cannot take advantage of the above two schemes, but there are procedures you could implement to aid cash flow, as follows:
1) Applications for payment
Applications for payment are written requests for payment of services rendered. Your client would therefore receive your request for payment before they are due to settle your fees. Once your client has paid, then a VAT invoice can be issued, at which date the VAT is payable to HMRC.
This is a good idea in principle. However if you were to implement this procedure, you would have to take the same approach with all your clients. So depending on type of matters that you deal with, it may be an advantage for some departments and not for others. But you cannot pick and choose. It is an “all or nothing” rule. There is also an administrative burden involved because you will have to issue and record two sets of fee notes.
2) Bad debts
VAT on bills which remain unpaid may be reclaimed from HMRC if they are more than six months old. Unpaid bills should be written off in your accounts specifically as ‘bad’ or ‘irrecoverable’ before such a claim is made. Any claims for VAT on bad debts should be included within your purchases (Box 4) of your VAT return.
Reviewing your office balances at month end and writing off any bad debts is far easier administratively but only aids cash flow long term whilst the other options noted above could help with more current issues if your firm is eligible.
Moore and Smalley can help with the application process for each of the above VAT schemes so if you require any further information or advice on any of the matters raised in this blog, please contact us on 01772 821021.