VAT Annual Accounting Scheme: Is It Right for Your Business?
Most VAT-registered businesses are required to submit VAT returns and payments each quarter. This must be done using accounting software that is compliant with the government’s Making Tax Digital system. However, for some businesses the VAT Annual Accounting Scheme can be a better option.
What is the VAT Annual Accounting Scheme?
The VAT Annual Accounting Scheme is a special scheme for VAT-registered businesses that want to send a single, annual return instead of four in a financial year. The scheme requires organisations to make advance payments towards their estimated VAT bill based on previous VAT returns. When the annual VAT return is submitted, the final balancing payment is then made, or a refund can be claimed in the case of overpayment.
Who is eligible for the VAT Annual Accounting Scheme?
VAT-registered businesses that have an estimated VAT taxable turnover of £1.35 million or less over the next 12 months are usually eligible for the scheme. There are exceptions for businesses that:
- Left the scheme in the last 12 months
- Are part of a VAT-registered division or group of companies
- Have overdue VAT returns or VAT payments
- Are insolvent
If a business’ VAT taxable turnover is likely to exceed £1.6 million at the end of the annual accounting year, it must leave the scheme.
How do VAT payments work?
Although organisations on the scheme only need to submit one VAT return, they must make advance payments throughout the year. These can be made monthly in nine interim payments (due at the end of months 4-12 of the annual accounting period) or quarterly in three interim payments (due at the end of months four, seven and ten).
Monthly payments are typically 10% of the total estimated bill, while quarterly payments are 25% of the bill. Businesses that are newly VAT-registered will have their payments estimated by HMRC.
When is the annual VAT return due?
For most companies with an accounting period of 4-12 months long, the VAT return is due two months after the end of the accounting period. Those with a shorter accounting period have one month after the end of the period to submit the return.
Why join the VAT Annual Accounting Scheme?
Advantages of the VAT Annual Accounting Scheme for businesses include:
- Fewer VAT returns to prepare and submit
- Advance payments may be easier to budget for
- More time to complete the annual VAT return
- Less quarterly VAT admin
- The option to align VAT work more closely with annual accounts
However, there are also several considerations. For example, advance payments may be too high if turnover falls, or payments may be too low if the business is experiencing rapid growth. Bookkeeping must also be maintained with accuracy and timeliness to avoid errors.
How to join the VAT Annual Accounting Scheme
VAT-registered businesses can apply to join or leave the scheme online or by post. If you think the scheme may benefit your organisation, speak to a reputable accountant first for a full evaluation of your VAT position. This will ensure you make an informed and sustainable decision
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