VAT Annual Accounting Scheme

A VAT registered businesses whose turnover is under £1.3 million can apply to use the VAT Annual Accounting Scheme. The attraction is that it means you only submit one VAT return each year and pay a fixed monthly amount to HMRC, based on the previous year’s liability. But then, of course, a balancing payment is due once the annual VAT return is filed
A business must stop using the VAT Annual Accounting Scheme if its taxable turnover exceeded £1.6 million in the previous accounting year. While in the scheme, the business makes nine monthly payments of 10% of the total VAT paid in the previous year or, if newly registered, the amount it is expecting to pay in the next 12 months.  It can also choose to pay 25% quarterly.  If the business trading pattern changes, HMRC may change the level of regular payments.
Please note:

• You may well not get approval to use the scheme if there is a significant debt to HMRC.
• Payments start on the last working day of the fourth month of the scheme’s accounting year and must be made by standing order or direct debit
• The annual VAT return, together with any balance due to HMRC, is submitted two months from the end of the scheme’s accounting year, providing an extra month compared to a normal return.

The VAT Annual Accounting Scheme can help some businesses with cash flow, particularly if the business is a seasonal one so that payments can be spread over the whole year. But that of course can create problems if you are not very disciplined in managing the cash. In general, the discipline of preparing a quarterly VAT return is a good thing and makes sure records are up to date. And with the advent of Making Tax Digital that will become essential.