Under the VAT Global Accounting Scheme the amount of VAT you pay is 1/6th of the difference between the amount of items you sell in a quarter and the amount you spent on new purchases. It’s only available to certain type of businesses who sell:
- second-hand goods
- works of art
- antiques, or
- collectors’ items
You cannot use the scheme for aircrafts, boats and outboard motors, caravans and motor caravans, horses and ponies, and motor vehicles, including motorcycles.
Why is the VAT Global Accounting Scheme Beneficial
Once your business turnover meets the VAT registration limit (currently £85,000) you will be obliged to account for VAT at 20% on each of your sales. If you are a second hand business who buys goods from non VAT registered people/businesses and sell these products onto the general public this will mean one of two things:
- Adding VAT to your sales price which may make you uncompetitive in the marketplace;
- Taking VAT out from your sales price will erode your margins all because you have had reached the VAT registration threshold.
In order to help growing businesses who find themselves in this situation, they can choose to use the VAT Global Accounting Scheme whereby each quarter they must:
- Add up the value of all eligible sales for the quarter
- Add up the value of all eligible purchases for the quarter
- Deduct the two and pay over 1/6th of the difference to HMRC as VAT
An Example of Working Out VAT Under the Global Accounting Scheme
You run a second hand business and during your VAT quarter make sales of £10,000 and purchases of £6,000.
Under the VAT Global Accounting Scheme you will pay VAT of £666.67 (£10,000 – £6,000 = £4,000 *1/6th).
If you had to pay VAT under the standard VAT Scheme you would have to pay VAT of £1,666.67 (£10,000 *20/120).
What Are Eligible Sales & Purchases Under the Global Scheme
HMRC sets out strict criteria which you need to follow when working out whether your sales can be included in the VAT Global Accounting Scheme:
- the goods must be eligible (second hand goods, antiques or works of art);
- you must have acquired the goods in eligible circumstances. In most cases, this means that you obtained the goods for resale in circumstances where you could not claim any VAT back (the most likely scenario is you bought your item from an individual);
- if you paid VAT on the items you have purchased you cannot use the Global Scheme;
- you cannot include any costs in regards to restoration or improvements when working out your purchase price;
- individual items you have purchased for over £500 each cannot be included in the global accounting scheme (but you can use the VAT margin scheme for these items providing you meet this schemes criteria).
What Happens to Ineligible Sales & Purchases
If you find that you have made an ineligible sale or purchase then you cannot use the scheme and must pay/charge VAT as normal.
Who Would Suit the VAT Global Accounting Scheme?
The VAT Global Accounting Scheme suits businesses who:
- buy and sell bulk volume, low value eligible goods, and
- are unable to maintain the detailed records required of businesses who use the Standard VAT Margin Scheme
What About VAT on Overheads
It is important to remember that the VAT Global Accounting Scheme is not an all or nothing type scheme, so it doesn’t necessarily need to apply to all of your sales and purchases.
Therefore if you have paid out for VAT on overheads, like rent or marketing, then you can still claim this VAT back. Of course this does mean you need to calculate two sets of VAT figures and add them together for each VAT return you submit – one for sales/purchases under the VAT Global Accounting Scheme and another for everything that falls into the Standard VAT Scheme (and keep the right records for each scheme!).
How to Register for the VAT Global Accounting Scheme
You don’t actually need to apply to use the VAT Global Accounting Scheme, you can just start using it. However its worth noting that the rules of the scheme are very complicated and there are penalties for using it incorrectly therefore it is important to seek professional advice if you are unsure about your eligibility or how to use it.