File only ONE Vat Return a Year!

HM Revenue & Customs (HMRC) have introduced a number of VAT schemes to reduce the administrative burden on small businesses. One such scheme is the annual accounting scheme.



What is the Annual Accounting Scheme?

Standard VAT Accounting

Using standard VAT accounting, you must complete four VAT Returns each year. Any VAT due is payable quarterly, and any VAT refunds due to you are also repayable quarterly.

Annual Accounting

Using annual VAT accounting, you make nine interim payments at monthly intervals, or three quarterly interim payments, throughout the year. You only need to complete one return at the end of the year when you either make a balancing payment or receive a balancing refund. Annual accounting can reduce your paperwork and make it easier to manage your cash flow.

Who can use the scheme?

You can use the Annual Accounting Scheme if your estimated VAT taxable turnover for the coming year is not more than £1.35 million. Your VAT taxable turnover includes any standard, reduced and zero-rated sales and other VAT taxable supplies, but excludes the VAT itself, VAT-exempt supplies and capital asset sales.

Once you are using annual accounting you can continue to do so as long as your estimated VAT taxable turnover remains below £1.6 million.

If you have been registered for less than a year, your expected taxable turnover will normally be the amount you entered on your application to register.

Who cannot use the Annual Accounting Scheme?

You cannot use annual accounting if:

• your estimated VAT taxable turnover is over £1.35 million per year
• you are registered for VAT as a division of a company or part of a group
• you have previously used annual accounting within the past 12 months
• you are not up to date on your VAT payments
• you are insolvent.

What are the advantages of annual accounting?

The advantages of annual accounting are:

• A reduction in the number of VAT returns needed each year from four to one.
• There is an extra month to complete the VAT return and pay any outstanding tax.
• The return can be prepared at the same time as the annual accounts.
• Because the liability to be paid each month is known and certain, cash flow can be managed more easily.
• Monthly payments spread the load.
• It should help to simplify calculations where the business uses a retail scheme or is partially exempt.

Are there any disadvantages?

• Seasonal or other variations may create an adverse effect on cashflow,
• Interim payments may be higher than needed because they are based on the previous year. However, they can be adjusted if the difference is significant.

A business is obliged to notify HMRC if the VAT liability is likely to be significantly higher or lower than in the previous year.

How are the payments structured?

Pay by monthly instalments

If you choose to pay your VAT by nine monthly instalments, each payment will be 10 per cent of the total amount of VAT you paid to HMRC in the previous year, or 10 per cent of the estimated total annual amount of VAT due to HMRC if you have been registered for VAT for less than 12 months. Your payments will be due by the end of months 4 to 12 of your annual accounting year.

If you choose to pay your VAT by three quarterly instalments, each payment will be 25 per cent of your previous year's VAT liability, or 25 per cent of your estimated VAT liability if you have been registered for VAT for less than 12 months. Your payments will be due by the end of months 4, 7 and 10 of your annual accounting year.

Balancing Payment

The balance of your actual VAT payable for your annual accounting year, based upon the VAT Return that you complete at the end of the year, is due two months after the end of your annual accounting year.

All of your payments must be made electronically. Instalments may be paid by Direct Debit, standing order or BACS. Your end of year balancing payment cannot be paid by Direct Debit.

The annual accounting period will usually begin at the start of the quarter in which the application is made. If the application is made late in a quarter it may begin at the start of the next quarter.

All businesses are able to apply to HMRC to change the level of the instalments if business has increased or decreased significantly.

How to fill in an annual VAT Return

Annual returns are completed in exactly the same way as quarterly returns, except that after calculating the annual VAT payment due, you deduct the interim payments you have already made to arrive at your end-of-year balancing payment due to you or HMRC.

Examples

The following examples compare annual accounting with conventional accounting for VAT. It has been assumed that sales are spread evenly throughout the year. If there are seasonal or other variations, annual accounting can show either a greater advantage or disadvantage depending on the accounting date chosen.

Example I
Business opting for quarterly payments with accounting date 30 June and which paid £8,000 VAT in the previous year
Month	Conventional Accounting (£)	Annual Accounting (£)	Cumulative Difference (£)
September 2009
October	2,500	2,000	(500)
November
December
January 2010	2,500	2,000	(1,000)
February
March
April	2,500	2,000	(1,500)
May
June
July	2,500		(4,000)
August		4,000

Example II
Business opting for monthly payments with accounting date 30 June and which paid £15,000 VAT in the previous year
Month	Conventional Accounting (£)	Annual Accounting (£)	Cumulative Difference (£)
September 2009
October	5,000	1,500	(3,500)
November		1,500	(2,000)
December		1,500	(500)
January 2010	5,000	1,500	(4,000)
February		1,500	(2,500)
March		1,500	(1,000)
April	5,000	1,500	(4,500)
May		1,500	(3,000)
June		1,500	(1,500)
July	5,000		(6,500)
August		6,500

Check with me if you would like further help or advice in this area.

Joining and leaving the Annual Accounting Scheme

Joining the Annual Accounting Scheme

To join the Annual Accounting Scheme, you must fill out an application form (Form 600 AA). You can join the Annual Accounting Scheme and the Flat Rate Scheme at the same time using one form (Form 600 AA/FRS).

Send your form to:

HM Revenue & Customs

Imperial House

77 Victoria Street

Grimsby

DN31 1DB

Grimsby VRS telephone number 0845 039 0279

Once you have joined the Annual Accounting Scheme you must notify HMRC if there are significant changes that may affect the amount of VAT you pay. Examples include:

• if your turnover is, or is likely to be, much higher or lower than the previous year
• if your VAT taxable turnover is or is expected to be more than £1.6 million, for instance if you buy another business
• if your VAT payable will, or has, increased by at least 10 per cent since the last time your instalments were calculated

How to leave the Annual Accounting Scheme

You may leave the scheme voluntarily at any time by notifying HMRC.

You must leave the scheme if your VAT taxable turnover is over £1.6 million. HMRC may remove you from the Annual Accounting Scheme for a number of reasons, including:

• if you calculate your VAT incorrectly
• if you are convicted of a VAT offence
• if you are assessed for a penalty for VAT evasion

If you leave the Annual Accounting Scheme, you can't rejoin for at least 12 months.