The VAT Annual Accounting Scheme is a VAT scheme designed to reduce VAT administration and improve small business cash flow. In this guide, I’ll explain more about the annual accounting scheme, how to join and the advantages of doing so.
Updated 20 July 2021
Table of contents
- 1. What is the Annual Accounting Scheme for VAT?
- 2. How Does the VAT Annual Accounting Scheme Work?
- 3. Who Is Eligible to Join the VAT Annual Accounting Scheme
- 4. Advantages of VAT Annual Accounting Scheme
- 5. Disadvantages of Annual Accounting for VAT
- 6. Making Tax Digital and VAT Annual Accounting
- 7. How to Join the VAT Annual Accounting Scheme
1. What is the Annual Accounting Scheme for VAT?
The annual accounting scheme permits VAT registered businesses to submit a single VAT return every year, along with making advance monthly VAT payments to HMRC towards this annual VAT return. There will also be a balancing payment of VAT repayment once the annual VAT return is submitted and the actual VAT liability is known.
2. How Does the VAT Annual Accounting Scheme Work?
Once a business has successfully joined the annual accounting scheme HMRC requires contributions towards their annual VAT bill which is either:
- Paid monthly at 10% of their estimated VAT bill or;
- Paid quarterly at 25% of their estimated VAT bill.
Payments are calculated using previous VAT returns if available or estimates if newly VAT registered.
Payments must be made electronically, in other words by bank transfer, direct debit or standing order etc. HMRC will confirm details of amounts and payment details when they agree you can join the scheme. But they do have set payment deadlines for annual accounting payment contributions which are:
|Payment Frequency||Payment Deadline|
|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|
If you are already VAT registered, then you cannot switch mid-VAT quarter. So you’ll need to complete your current VAT quarter and then commence your new VAT quarter under the annual accounting scheme. This means for you may make lower monthly payments before being required to submit your first annual accounting VAT return.
3. 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. 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.
4. Advantages of VAT Annual Accounting Scheme
The annual accounting scheme is beneficial for businesses that want to:
- Reduce their VAT admin and avoid filling in 4 VAT returns each year;
- Have more certainty around VAT payments;
- Predict their VAT liability with some certainty so you don’t end up trapped in a scheme where you know you are overpaying each month;
5. Disadvantages of Annual Accounting for VAT
Annual accounting for VAT isn’t right for every business, here are some reasons why:
- If the businesses turnover takes a dip during the 12 month VAT period, it can find itself making higher monthly VAT payments than is ultimately necessary. Although monthly payments can be amended, this can take time and it’s not guaranteed that HMRC will agree to reduce them leaving the business in a position of have to wait to submit their annual VAT return to get a repayment;
- The scheme is probably not suitable for new businesses and start-ups spending money on setup which have VAT on expenses. because they’ll have to wait 12 months to get their VAT repayments.
6. Making Tax Digital and VAT Annual Accounting
In recent years, HMRC has taken steps to begin digitising the entire tax system (known as Making Tax Digital) which includes submission of VAT returns using approved bookkeeping software. Instead of filling out a manual VAT return with total figures, VAT registered businesses must maintain their bookkeeping electronically so that the software calculates the figures that go onto each VAT return and submits them electronically to HMRC.
This means if you are VAT registered, whether using the annual accounting scheme, standard scheme or any other scheme, you’ll need to do your bookkeeping on an HMRC approved software. Then when you’re ready to submit your annual accounting VAT return, you’ll do that through your cloud-based system.
It is important you choose a bookkeeping software that can handle the annual accounting VAT scheme such as Quickbooks or Xero. If you are using one that doesn’t handle different VAT schemes, then HMRC does permit you to make an adjustment to your return before submitting it. But this can get complicated, so it is advisable to choose one that is compatible with the annual accounting scheme so everything gets calculated on your behalf.
7. How to Join the VAT Annual Accounting Scheme
You can apply to HMRC to join the scheme either online or by post, completing an HMRC form called the VAT600AA.
If you are new to VAT then you can apply to join the annual accounting scheme as part of your application. You’ll be asked if there are any VAT schemes you’ll like to join before you submit your VAT registration form.
If you are already VAT registered, then you can complete a VAT600AA online and submit it as part of your business account. 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.
If you need to apply by post you can print and post a form VAT600AA to the address below:
HMRC National Registration Unit
77 Victoria Street
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.