We’ve covered the flat rate accounting scheme in a previous article, which is beneficial to startups and small businesses. There are advantages too to the Annual Accounting VAT Scheme which will also be of interest to these business types. There’s some great news too about both schemes that means you won’t have to choose one over the other. Armed with this knowledge, you can have an informed discussion about your VAT scheme with your accountant to choose which best suits your business.
This article lays out an executive summary of the Annual Accounting VAT Scheme and how it is advantageous to businesses.
How the Annual Accounting Scheme Works
The annual accounting scheme allows a business to complete just one VAT return for the year period, instead of four. Instead of one large payment for VAT, you’ll pay instalments of the VAT you expect to owe.
You may choose to make either three quarterly or nine monthly instalment payments, to spread the cost of your VAT liability throughout the year period. These payments must be made via Direct Debit, Standing Order or other electronic means.
Advantages of the Annual Accounting Scheme
- Reduced reporting burden (just one VAT return per year instead of four).
- Allows the business to make payments at a set amount, either monthly or quarterly, towards their total VAT bill for the year. Additional payments may be made adhoc, as it suits the business. You then have two months (instead of one) to submit your annual VAT return and pay the remaining balance due.
- Aids cash flow management (via forecasting).
- Can be advantageous for businesses whose revenue is seasonally dependent (e.g., retailers get a surge at Christmas).
- Can be used in combination with other VAT schemes, e.g., the Flat Rate VAT Scheme.
Eligibility for the Annual Accounting VAT Scheme
In order to qualify for the annual accounting scheme, your company must have “taxable supplies” of £1.35 million or less (turnover excluding VAT).
You’ll be able to stay in the annual VAT scheme unless your taxable turnover exceeds £1.6 million per year.
When you register for VAT you’ll make an estimate of your expected earnings for the year, which may be based on the previous 12 months, or your estimate may be based on your business plan or information from a previous business owner.
If you realise during the year that you’ll exceed the £1.6 million limit on the annual accounting scheme, you must inform HMRC immediately, and you’ll be withdrawn from the scheme.
So long as there’s reasonable grounds for your estimate, you won’t be penalised if you go over the £1.6 million limit, so it’s important to ensure you keep a record of how you arrived at the estimation.
You may not join the scheme if your business:
- Is VAT registered as part of a group or division of a company.
- Has stopped using Annual Accounting in the last 12 months.
- Is insolvent.
- Has a VAT debt that is getting bigger.
You may be allowed to use the scheme if you have a small VAT debt and have agreed proposals to clear that debt with HMRC.
Paying Instalments
You may elect to pay either three quarterly instalments or nine monthly instalments, with a two-month break before having to submit your VAT return and pay the remaining balance of your VAT owed.
Under normal conditions, you’ll pay nine instalments of 10% of your last year’s annual VAT bill, or, if you’ve applied for quarterly instalments instead, for each quarterly instalment you’ll pay 25% of your expected VAT bill.
| Payments Due | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Months of Period | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11 | 12 | 13(1) | 14(2) |
| Monthly Payments | 1st | 2nd | 3rd | 4th | 5th | 6th | 7th | 8th | 9th | Final Payment | ||||
| Quarterly Payments | 1st | 2nd | 3rd | Final Payment | ||||||||||
Simple Examples of Paying Instalments
If your previous year’s VAT bill was £10,000, you could expect to pay nine monthly payments of £1,000 or three quarterly payments of £2,500, with a final payment being equal to your remaining VAT liability for the annual period.
The Annual Accounting Registration Unit
You would expect to pay these instalments if your previous 12 month period had a £10,000 VAT bill. But if you expect your VAT bill to be significantly different from the previous 12 month period, you may contact the Annual Accounting Registration Unit and explain your case. If the team agrees with your forecast, they will revise your instalments up or down as necessary.
You might also contact this team if there is a significant change in the circumstances of your business, for example if you expect that your turnover will exceed £1.6 million for the annual period.
The HMRC can be contacted online or via telephone. Their contact details for general VAT enquiries are found on this HMRC enquiries page.
Combining Annual Accounting & Flat Rate Schemes
You may apply to use the annual accounting scheme in combination with the Flat Rate VAT Scheme. You may instead opt to combine the annual accounting scheme with other schemes, like the Cash Accounting Scheme or Retail Schemes for example. We’ll cover these schemes in a later article.
Combining accounting schemes can make a significant difference to the cost of your VAT bill along with reducing the burden of monthly VAT reporting. Discuss your options with your accountant if you’re unsure about which scheme(s) suit your business best.
How to Apply for the Combined Annual and Flat Rate Schemes
Applying for the Annual Accounting and Flat Rate VAT schemes is a matter of paperwork, which your accountant may complete on your behalf. If you wish to do so directly, here’s a link to the application document. The form you need is called VAT600AA/FRS.
How to Withdraw from the Annual Accounting Scheme
If you wish to withdraw from the Annual Accounting Scheme, you just need to contact the Annual Accounting Registration Unit and tell them so. You’ll return to the normal method of paying and accounting for your VAT liability, but you’ll still get two months to submit your final VAT return along with any remaining payment balance.
In Summary
The Annual Accounting VAT Scheme is a great tool for business owners, since it allows them to really take control of their cash flow by enabling them to manage their VAT bill. Breaking VAT payments into manageable chunks that can be paid on a monthly or quarterly basis and reducing reporting burden, the scheme can also be combined with other accounting schemes like the Flat Rate Scheme, which helps reduce VAT liability. What’s not to like?