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How to use the VAT annual accounting scheme for your business

All businesses, whether sole traders, partnerships or limited companies, are required to register for VAT when their annual turnover reaches the VAT threshold. This is currently £85,000. Many businesses will choose to register for business and commercial reasons, such as increased cashflow, prior to reaching this threshold.

Once registered, businesses have to abide by a range of statutory requirements, but a number of VAT accounting schemes allow some businesses to simplify the VAT process. These are designed to reduce the administrative burden on smaller businesses. One such scheme is the VAT annual accounting scheme.


What is the VAT annual accounting scheme?

The Annual Accounting Scheme allows businesses to make agreed payments on their VAT account, and only one VAT return per year rather than four. This is designed to make it easier to budget while aiding cashflow. It vastly simplifies the paperwork required for VAT, saving businesses time and expense.

The scheme allows you to pay VAT on account, in either nine monthly or three quarterly payments. You can then complete a single, annual VAT return. This is used to calculate any balance that’s owed by your business or due from HMRC.

To be eligible for the scheme your estimated taxable turnover must be no more than £1.35 million. You can then remain in the scheme for as long as your taxable turnover remains below £1.6 million. If you are eligible for the annual accounting scheme it may be possible for you to combine it with the flat rate VAT and VAT cash accounting schemes.


How does the annual VAT scheme work?

Businesses that have been VAT registered for 12 months or more will pay their VAT in nine monthly instalments of 10% of the previous year’s liability. These instalments will be payable at the end of months 4-12 of the annual accounting period.

Alternatively, VAT-registered businesses that are part of the scheme can choose to pay their VAT in three quarterly instalments of 25%. The liability for each payment falls at the end of months 4,7 and 10. The remaining balance of that year’s VAT is then due together with the VAT return two months after the end of the annual accounting period.

If your business has not been VAT registered for at least 12 months it’s still possible to join the scheme but each instalment is based on the estimate of the VAT liability. This applies whether you opt for monthly or quarterly payments. In each case, HMRC will advise about the amount of the instalments that are due to be paid.

If the turnover of the business has increased or decreased significantly it’s possible to apply to HMRC to change the level of the instalments. The annual accounting period will usually begin at the beginning of the quarter in which the application has been made. When the application is made late in a quarter it may begin at the start of the following quarter.


Should I apply for the annual accounting scheme?

The annual accounting scheme has a range of advantages for VAT-registered businesses. These are:

  • You only have to make a single VAT return a year.
  • You are given an extra month for submission.
  • The VAT return can be prepared at the same time as annual accounts.
  • It lets you know your cashflow in advance so can make it easier to plan.
  • By opting for monthly payments you can spread the financial load.
  • It can simplify the operation of retail or partial exemption schemes.

Its principal disadvantages are that interim payments that are based on the business performance in previous years can be higher than necessary. These can be reduced if there is a significant difference. Seasonal and other variations can have an adverse impact on cashflow.

The VAT annual accounting scheme can simplify the paperwork required for VAT and can make the transition towards VAT registration easier for growing businesses.


How Venn Accounts can help

At Venn Accounts, we provide a comprehensive statutory accounting service for our clients. Not only can we take care of your annual accounts and VAT requirements, we can also provide impartial advice about how to grow your business, reduce your bills and simplify your statutory requirements.

If you are a VAT-registered business we can advise about the various schemes that are available to simplify the process.

To find out more please call our team of senior chartered accountants on 020 8088 2590, email enquiries@vennaccounts.co.uk, or complete our contact form, and we will be back in touch as soon as possible.


Get in touch

Operating from our London head office, Venn Accounts a traditional accounting firm. We are committed to ensuring all our clients are completely clear about what we can do for them, while fully supporting them every step of the way.

Contact us and speak to a member of our team about our annual account service.