HMRC offers a numbers of different VAT schemes to try and make things easier for small businesses but knowing which one is most suitable for you can be a bit more tricky. The VAT Annual Accounting Scheme is available to traders and small businesses designed to reduce their administrative burden and ease cashflow.
What is the VAT Annual Accounting Scheme?
Generally speaking VAT registered businesses submit four quarterly VAT returns & payments each year. However with the Annual Accounting Scheme businesses:
- Submit one return per year (due two months after the end of your accounting period);
- Make monthly advance payments towards the VAT on the annual VAT return (along with a balance payment, if required, when the annual VAT return is submitted).
Who Is Eligible to Join the VAT Annual Accounting Scheme
What is Taxable Turnover? This is the value of your sales that would be relevant for charging 20%. To calculate whether you should be VAT registered you would need to exclude any sales that would be exempt from VAT (such as insurance or some financial services).
You cannot use the VAT Annual Accounting Scheme if:
- you have left the scheme in the last 12 months;
- you’re is part of a VAT registered division or group of companies;
- you’re behind on your VAT Returns or payments;
- you’re insolvent.
How Much VAT Must You Pay Each Month?
Once you have successfully applied to join the Annual Accounting Scheme HMRC will require that you make a payment each month of either:
- 10% of your estimated VAT bill (monthly payments) or;
- 25% (quarterly payments).
The percentage you pay is based on your previous VAT returns if you are already VAT registered or estimates if you are newly VAT registered. You must make these payments electronically (bank transfer, standing order etc) but HMRC will confirm details of amounts and payment details when they agree you can join the scheme.
If you are already VAT registered and looking to switch you may need to complete your current VAT period under your existing scheme before switching to annual accounting (in other words you can’t switch mid-quarter). This means for you may make less monthly payments before being required to submit your first annual VAT return.
Once you submit your annual VAT return you need to make a final ‘balancing’ payment which is the difference between your actual VAT bill and your advance payments. Equally, if you have overpaid HMRC will send you a VAT refund.
Monthly VAT Payment Deadlines
Here are the payment deadlines for quarterly and monthly instalments, as set out by HMRC:
|Monthly||Due at the end of months 4, 5, 6, 7, 8, 9, 10, 11 and 12|
|Quarterly||Due at the end of months 4, 7 and 10|
|Final payment||Within 2 months of month 12|
What Type of Businesses Suit the VAT Annual Accounting Scheme?
- You want to reduce your VAT administrative burden;
- You want more certainty around your cash payments;
- You can predict your VAT liability with some certainty so you don’t end up trapped in a scheme where you know you are overpaying each month;
- The scheme is probably not suitable if you are expecting repayments for example: a start up because you only get one repayment per year.