The Annual Accounting Scheme is available to traders and small businesses designed to reduce their VAT administration and help with cash flow.

annual accounting scheme

What is the Annual Accounting Scheme for VAT?

The Annual Accounting Scheme lets registered businesses submit one VAT return per year and requires monthly advance payments towards this annual VAT return. Along with a balancing payment, if required, when the annual VAT return is submitted.

Who Is Eligible to Join the VAT Annual Accounting Scheme

Anyone who is VAT registered is eligible to join the scheme if their taxable turnover is £1.35m or less over the next 12 months.

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:

PaymentDeadline
MonthlyDue at the end of months 4, 5, 6, 7, 8, 9, 10, 11 and 12
QuarterlyDue at the end of months 4, 7 and 10
Final paymentWithin 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.

You can apply to join the VAT Annual Accounting Scheme by post or online, but first you should check your eligibility.

Who Is Eligible to Join the VAT Annual Accounting Scheme

Anyone who is VAT registered can join the scheme if their taxable turnover is £1.35m or less over the next 12 months.

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.

What are the Advantages of Annual Accounting for VAT

There are two main advantages of joining the annual accounting scheme:

  • You avoid the administration involved in filing 4 VAT returns;
  • You can manage your cash flow better because you know how much VAT you’ll pay each month.

What are the Disadvantages of Annual Accounting for VAT

The main disadvantage of being part of annual accounting is that if you turnover goes down during your 12 month VAT period you could find yourself paying higher monthly amounts than necessary.

You’ll then need to wait to submit your annual VAT return to get a refund.

Annual Accounting and Making Tax Digital

Making Tax Digital was rolled out in April 2019 and although a 6 month deferral is in place for anyone registered for Annual Accounting, from October 2019 the rules of Making Tax Digital must be followed.

This essentially means using an HMRC approved bookkeeping system like Quickbooks to calculate and submit your annual VAT return.

How to Join the VAT Annual Accounting Scheme

You can apply to HMRC to join the scheme either online or by post.

How to Apply to Join Annual Accounting Online

If you are new to VAT you can select to join the scheme as part of your online application form.

If you are already VAT registered, then you can complete an online form and submit it as part of your business account.

If you apply online you will receive confirmation that you have been accepted to join the scheme within your online account, so keep an eye out for notifications that you have received a new message.

How to Apply to Join Annual Accounting By Post

If you need to apply by post you can print and post a form VAT600 AA to the address below:

HMRC National Registration Unit

Imperial House
77 Victoria Street
GRIMSBY
Lincolnshire
DN31 1DB

You may need to include a Direct Debit form (VAT623) with your application, if you choose to pay in this way.

HMRC will contact you by post to confirm your application has been successful if you applied by post.

Anita

Anita is a Chartered Accountant with over a decade of experience taking self employed business owners from financially confused to business savvy.
She is the creator of the ‘Go Self Employed’ website, which her corner on the internet where she makes self employment less terrifying.
Anita