VAT Annual Accounting Scheme: what businesses need to know

The VAT Annual Accounting Scheme can reduce the number of VAT returns your business has to submit.

Usually, VAT-registered businesses submit VAT returns and make VAT payments four times a year. Under the VAT Annual Accounting Scheme, you submit one VAT return a year instead. However, this does not mean you only think about VAT once every twelve months. You normally make advance payments towards your VAT bill during the year, followed by a balancing payment or refund when you submit the annual return.

For some businesses, this can reduce admin and make VAT payments easier to plan. For others, it can create cash flow issues or delay VAT refunds.

Here is what you need to know before deciding whether the VAT Annual Accounting Scheme is right for your business.

What is the VAT Annual Accounting Scheme?

The VAT Annual Accounting Scheme is a special VAT scheme for eligible VAT-registered businesses.

Instead of sending four VAT returns a year, you send a single, annual return. During the year, you make advance payments towards your estimated VAT bill. These payments are usually based on your previous VAT returns or on an estimate if you are newly VAT-registered.

When you submit your annual VAT return, you either make a final balancing payment or claim a refund if your advance payments were too high.

HMRC will then use your VAT position to set or adjust payments for the next annual accounting period.

The main benefit is fewer VAT returns. However, the scheme does not remove the need for accurate digital records, careful VAT coding or good bookkeeping.

VAT-registered businesses still need to keep digital VAT records and submit VAT returns using compatible software. The annual accounting scheme changes how often you submit a VAT return, but it does not remove your digital record-keeping obligations.

Who can use the VAT Annual Accounting Scheme?

You can usually join the VAT Annual Accounting Scheme if your business is VAT registered and your estimated VAT taxable turnover is £1.35 million or less in the next 12 months. VAT taxable turnover means the total value of everything you sell that is not VAT exempt.

However, not every business can use the scheme.

You cannot normally join if:

• You left the scheme in the last 12 months
• Your business is part of a VAT-registered division or group of companies
• Your VAT returns or VAT payments are not up to date
• The business is insolvent

You must also leave the scheme if you are no longer eligible, or if your VAT taxable turnover is, or is likely to be, more than £1.6 million at the end of the annual accounting year.

Check the full eligibility rules on GOV.UK.

How do VAT payments work?

The scheme’s name can be slightly misleading. Although you submit one VAT return a year, you do not usually make just one VAT payment.

Instead, you normally make interim payments during the year, followed by a balancing payment when you submit your annual VAT return.

If you choose monthly payments, you usually make nine interim payments. These are due at the end of months 4 to 12 of your annual accounting period. Each payment is normally 10% of your estimated VAT bill, so the nine payments cover 90% of the estimate.

If you choose quarterly payments, you usually make three interim payments. These are due at the end of months 4, 7 and 10. Each payment is normally 25% of your estimated VAT bill, so the three payments cover 75% of the estimate.

HMRC usually bases the estimate on your previous VAT returns. If you are new to VAT, it may use an estimate instead.

When you submit your annual VAT return, the final balancing payment deals with the remaining amount and any difference between the estimated VAT bill and the actual VAT due.

If your interim payments were too low, you pay the balance. If you paid too much, you may be due a refund.

When is the annual VAT return due?

There are usually 12 months in your VAT annual accounting period.

If your accounting period is between four and 12 months long, your VAT return is due two months after the end of the accounting period. If the accounting period is less than four months long, the return is due one month after the end of the period.

HMRC tells you the amounts and due dates for your instalments. It also confirms when your annual VAT return and balancing payment are due. You can read more about return and payment deadlines on GOV.UK.

This extra time can be useful. Even so, you still need to keep your records up to date during the year. Leaving VAT work until the annual return deadline can create a large, avoidable problem.

What are the advantages of the VAT Annual Accounting Scheme?

The scheme can suit businesses that want a simpler VAT routine and more predictable payment dates.

The main advantages are:

• Fewer VAT returns to prepare and submit
• Advance payments that may be easier to budget for
• More time to complete the annual VAT return
• Less quarterly VAT admin
• The option to align VAT work more closely with annual accounts

It can also help businesses that find quarterly VAT deadlines disruptive. If your bookkeeping is well organised, annual accounting may reduce the number of VAT reporting points without reducing control.

What are the disadvantages?

The VAT Annual Accounting Scheme is not right for every business.

It may not suit you if you regularly reclaim VAT, because you will usually only receive one VAT refund a year when you submit your annual VAT return.

There are other drawbacks too.

For example:

• Advance payments may be too high if your turnover falls
• Payments may be too low if your business grows quickly
• A large balancing payment can still arise at the end of the year
• VAT errors may go unnoticed for longer
• Poor bookkeeping can turn the annual return into a major task
• You may have less regular visibility over your VAT position

HMRC’s VAT Notice 732 says you should check whether the schedule of payments reflects your business. If interim payments are too low, you will have a larger balancing payment. If they are too high, you may pay money earlier than needed.

Can you change your VAT payments?

Yes, in some cases.

If you disagree with the amount of your interim payments, or you expect your VAT liability to change significantly, you can contact HMRC and explain how you have calculated your revised instalments. If HMRC agrees, it will write to confirm the new amounts.

You must also tell HMRC about significant changes that affect the amount of VAT you pay. This includes cases where your taxable supplies are likely rise above £1.6 million, or your VAT payable has increased by 10% since the last time your instalments were calculated.

This is one reason the scheme still needs active management. The annual accounting scheme reduces the number of returns, but it does not remove the need to monitor your VAT position.

Can you use annual accounting with other VAT schemes?

Yes. In some cases, the VAT Annual Accounting Scheme can be used with other VAT schemes.

HMRC says annual accounting can be used with the VAT Flat Rate Scheme. VAT Notice 732 also refers to the use of annual accounting with some retail schemes, the Cash Accounting Scheme, and partial exemption calculations.

However, combining schemes can make VAT treatment more complex.

For example, if you join the Flat Rate Scheme part-way through an annual accounting period, you may need to split the annual VAT return calculation. One part would use the normal VAT rules, while the other would use the Flat Rate Scheme rules. A similar issue can arise if your flat rate percentage changes during the year.

Annual accounting may also be used with the VAT Cash Accounting Scheme, but this should be checked carefully. The right VAT scheme depends on how and when money comes into and leaves your business.

For that reason, it is worth taking advice before combining VAT schemes. What looks simpler at first may create extra work later.

How do you join or leave the scheme?

If you are not already VAT registered, you can register for VAT and join the VAT Annual Accounting Scheme at the same time. If you are already VAT registered, you can apply to join the scheme online or by post.

It’s also worth noting that, if your VAT turnover is £150,000 or less, you may also be eligible for the VAT Flat Rate Scheme. You need to apply for that separately if you want to use it.

You can leave the VAT Annual Accounting Scheme at any time. However, you must leave if you are no longer eligible. Once you leave, you have to wait 12 months before you can rejoin.

Is the VAT Annual Accounting Scheme right for your business?

The VAT Annual Accounting Scheme can be useful, but whether it is suitable for you depends on how your business works.

It is usually most useful when your VAT bills are fairly predictable, your bookkeeping is already up to date and you do not normally rely on regular VAT refunds.

The scheme may not suit businesses with unpredictable sales, rapid growth or regular VAT repayments. For those businesses, quarterly VAT returns may give better visibility and quicker access to refunds.

The key question is not simply whether one VAT return sounds easier than four. It is whether the scheme benefits your business.

How THP can help

The VAT Annual Accounting Scheme can reduce VAT admin, but it needs to be used carefully.

THP can help you:

• Check whether your business is eligible
• Compare annual accounting with standard quarterly VAT returns
• Review whether the VAT Cash Accounting scheme or Flat Rate Scheme may be better
• Assess the cash flow effect of advance VAT payments
• Set up cloud accounting software and VAT codes
• Prepare and submit VAT returns
• Deal with HMRC if your circumstances change

If you are unsure whether the VAT Annual Accounting Scheme is right for your business, speak to THP. We can help you choose a VAT approach that fits your turnover, cash flow and record-keeping.