VAT — annual accounting scheme

HMRC has intro­duced a num­ber of VAT schemes over the years designed to reduce the admin­is­tra­tive bur­den on small busi­ness­es. One such scheme is the annu­al account­ing scheme.

What is the annual accounting scheme?

The annu­al account­ing scheme helps small busi­ness­es by allow­ing them to sub­mit only one VAT return annu­al­ly rather than the nor­mal four. Dur­ing the year they pay instal­ments based on an esti­mat­ed lia­bil­i­ty for the year with a bal­anc­ing pay­ment due with the return. The scheme is intend­ed to help with bud­get­ing and cash flow and reduce paper­work.

Joining the scheme

A busi­ness can apply to join the scheme if it expects tax­able sup­plies in the next 12 months will not exceed £1,350,000.

Busi­ness­es must be up to date with their VAT returns and can­not reg­is­ter as a group of com­pa­nies.

Appli­ca­tion to join the scheme must be made on form 600(AA) which can be found on the GOV.UK web­site or via a link in the online ver­sion of VAT Notice 732. HMRC will advise the busi­ness in writ­ing if the appli­ca­tion is accept­ed.

Paying the VAT

Busi­ness­es that have been reg­is­tered for 12 months or more will pay their VAT in nine month­ly instal­ments of 10% of the pre­vi­ous year’s lia­bil­i­ty. The instal­ments are payable at the end of months 4–12 of the cur­rent annu­al account­ing peri­od.

Alter­na­tive­ly such busi­ness­es may choose to pay their VAT in three quar­ter­ly instal­ments of 25% of the pre­vi­ous year’s lia­bil­i­ty falling due at the end of months 4, 7 and 10.

The bal­ance of VAT for the year is then due togeth­er with the VAT return two months after the end of the annu­al account­ing peri­od.

Busi­ness­es that have not been reg­is­tered for at least 12 months may still join the scheme but each instal­ment – whether month­ly or quar­ter­ly – is based on an esti­mate of the VAT lia­bil­i­ty.

In all cas­es HMRC will advise the amount of the instal­ments to be paid.

The annu­al account­ing peri­od will usu­al­ly begin at the start of the quar­ter in which the appli­ca­tion is made. If the appli­ca­tion is made late in a quar­ter it may begin at the start of the next quar­ter.

All busi­ness­es are able to apply to HMRC to change the lev­el of the instal­ments if busi­ness has increased or decreased sig­nif­i­cant­ly.

Leaving the scheme

Any busi­ness can leave the scheme vol­un­tar­i­ly at any time by writ­ing to HMRC.

A busi­ness can no longer be in the scheme once its annu­al tax­able turnover exceeds £1,600,000.

Advantages of the scheme

• A reduc­tion in the num­ber of VAT returns need­ed each year, from four to one.
• Because the lia­bil­i­ty to be paid each month is known and cer­tain, cash flow can be man­aged more eas­i­ly.
• There is an extra month to com­plete the VAT return and pay any out­stand­ing tax.
• It should help to sim­pli­fy cal­cu­la­tions where the busi­ness uses a retail scheme or is part­ly exempt.

Potential disadvantages

Inter­im pay­ments may be high­er than need­ed because they are based on the pre­vi­ous year. How­ev­er, it is pos­si­ble to apply to HMRC for an adjust­ment if the dif­fer­ence is sig­nif­i­cant.

A busi­ness is oblig­ed to noti­fy HMRC if the VAT lia­bil­i­ty is like­ly to be sig­nif­i­cant­ly high­er or low­er than in the pre­vi­ous year.