Annual accounting scheme

What is annual accounting?

Under annual accounting, you make agreed payments on account and need complete only one VAT return per year. The purpose of the scheme is to aid cash flow and budgeting.

Who can use the scheme?

Annual accounting is normally open to you if you do not expect your taxable turnover to exceed £1,350,000 in the next twelve months. You should exclude the value of expected sales of capital assets. If you have been registered for less than a year, your expected taxable turnover will normally be the amount you entered on your application to register.

You have to apply to use the scheme, using form VAT600 AA if the application is only for the annual accounting scheme or form VAT600 AA/FRS if it is a joint application to use the annual accounting and flat rate schemes. These forms can be printed off from the HMRC website found by entering VAT600 AA or VAT600 AA/FRS. You can at the same time apply to join the Flat Rate Scheme. Note also that those who used HMRC's online services to register for VAT may apply online to use this scheme if the application is submitted at the same time.

You may withdraw from the scheme voluntarily at any time by application in writing to your local VAT office.

What are the advantages of annual accounting?

The advantages of annual accounting are:

  • Only one VAT return per year, with an extra month for submission
  • The return can be prepared at the same time as the annual accounts
  • Cash flow is known in advance
  • Monthly payments spread the load
  • It simplifies the operation of retail or partial exemption schemes

Are there any disadvantages?

Possible disadvantages are:

  • Interim payments based on previous years may be higher than necessary (but can be reduced if the difference is significant)
  • Seasonal or other variations may create an adverse effect on cash flow

How are the payments structured?

Businesses will make either:

  • Nine monthly interim payments of 10% of the previous year's VAT payments (or 10% of their estimated payments if registered for less than a year), commencing on the last day of the fourth month of the VAT year, or
  • Three quarterly interim payments of 25% of the previous year's VAT payments (or 25% of their estimated payments if registered for less than a year)

According to which method best suits their needs. However, the monthly method will be applied unless the quarterly method is specifically requested.

In both cases, the interim payments may be adjusted to take into account any expected changes in turnover and trading. The balance of VAT due for the year is payable two months after the year end, together with submission of the VAT return.

Payments must be made by direct debit, or by a choice of electronic payment methods.

What if my turnover goes over £1,350,000?

There is a tolerance built into the scheme. Once you are using annual accounting, you can normally continue to use it until the end of the year in which the value of your taxable supplies exceeds £1,600,000.

Are there other conditions?

HMRC may expel you from the scheme in certain circumstances, including:

  • Failure to submit the return by the due date
  • Failure to make any payment on time, unless in circumstances beyond your control

Conclusion

Annual accounting merits consideration by all small businesses. In most cases, the advantages will outweigh any potential disadvantages.

Examples

The following examples compare annual accounting with conventional accounting for VAT. It has been assumed that sales are spread evenly throughout the year. If there are seasonal or other variations, annual accounting can show either a greater advantage or disadvantage depending on the accounting date chosen.

Example I
Business opting for quarterly payments with accounting date 30 June and which paid £8,000 VAT in the previous year
Month Conventional
Accounting (£)
Annual
Accounting (£)
Cumulative
Difference (£)
September 2014      
October 2,500 2,000 (500)
November      
December      
January 2015 2,500 2,000 (1,000)
February      
March      
April 2,500 2,000 (1,500)
May      
June      
July 2,500   (4,000)
August   4,000  

 

Example II
Business opting for monthly payments with accounting date 30 June and which paid £15,000 VAT in the previous year
Month Conventional
Accounting (£)
Annual
Accounting (£)
Cumulative
Difference (£)
September 2014      
October 5,000 1,500 (3,500)
November   1,500 (2,000)
December   1,500 (500)
January 2015 5,000 1,500 (4,000)
February   1,500 (2,500)
March   1,500 (1,000)
April 5,000 1,500 (4,500)
May   1,500 (3,000)
June   1,500 (1,500)
July 5,000   (6,500)
August   6,500  

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