Last updated: 14 October 2026
Can a VAT scheme really save you time and money?
Yes, for the right business. HMRC’s special VAT schemes, cash accounting, annual accounting and the flat rate scheme, can reduce admin, smooth cash flow or lower the VAT you pay. But each one has entry limits and trade-offs, and the wrong choice can cost you money. A scheme that saves time for a consultant with few costs may cost more for a retailer that buys a lot of stock.
The main schemes at a glance
| Scheme | Entry limit (taxable turnover, excluding VAT) | Main benefit | Main drawback |
| Cash accounting | £1.35 million | Pay VAT only when customers pay you | Reclaim VAT only when you pay suppliers |
| Annual accounting | £1.35 million | One return a year, fixed instalments | Instalments may not match actual VAT |
| Flat rate scheme | £150,000 | Simple calculation; can save VAT for low-cost businesses | Can’t usually reclaim VAT on purchases |
You must leave cash and annual accounting if your turnover goes over £1.6 million, and the flat rate scheme if your total income goes over £230,000.
Where the time savings come from
- Annual accounting: one VAT return instead of four, with monthly or quarterly instalments based on last year’s VAT
- Flat rate scheme: no need to track input VAT on most purchases; you multiply VAT-inclusive turnover by your sector percentage
- Cash accounting: you don’t have to pay VAT on invoices customers haven’t paid, which also gives you automatic bad debt relief
Making Tax Digital still applies to all three schemes, so you need compatible software.
Where the money savings come from
The flat rate scheme can mean paying less VAT than standard accounting if your costs are low and your sector rate is favourable. Cash accounting protects cash flow if customers pay late. Annual accounting helps with budgeting.
Example
A web designer has VAT-inclusive turnover of £72,000 and spends £1,200 a year, including VAT, on goods. That is less than 2% of her VAT-inclusive turnover (£1,440), so she is a limited cost trader and her flat rate is 16.5%, giving VAT of £11,880. Under standard accounting, her VAT due would be £12,000 less £200 VAT on her costs, so £11,800. The flat rate scheme costs her £80 more, so she stays on standard accounting, perhaps with cash accounting to help cash flow.
When schemes don’t help
- Businesses that make large purchases or have high VAT-able costs (flat rate scheme)
- Businesses that are usually in a repayment position (cash and annual accounting delay refunds)
- Businesses with fast-growing turnover near the exit limits
How to join
You can join cash accounting without applying, from the start of a VAT period. Annual accounting and the flat rate scheme need an application to HMRC. Keep a note of the date you start each scheme.
Review every year
Your business changes, so review your scheme at least once a year, ideally before your VAT year starts. Compare what you would have paid under each method.
Frequently asked questions
Can I use more than one scheme?
Yes. Cash accounting can be combined with annual accounting. The flat rate scheme has its own cash-based option.
Which scheme is best for a new business?
It depends on costs and cash flow. See VAT flat rate scheme for new businesses.
Can I leave a scheme?
Yes, at any time, with notice to HMRC where required.
Is standard accounting ever better?
Yes, especially if you have significant costs.
Related: standard VAT accounting and calculating VAT.
Talk to Accotax
Want this handled for you? Our team at Accotax can help with choosing a VAT accounting scheme. See our VAT accountants service, or contact us for a free, no-obligation quote.
This page is general guidance based on HMRC rules for the 2026/27 tax year, checked against gov.uk on 14 October 2026. It is not personal advice, so speak to an accountant about your own situation.
