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VAT – Annual Accounting Scheme


The annual VAT scheme was created to simplify the accounting procedures for small businesses and also to reduce costs. It also has more advantages, like reducing the administration time and the associated costs, and helping you manage your cash flow. If you se this scheme for your business, you are only required to file one VAT return at the end of the year.

In order to be able to apply to this scheme to the HMRC, you have to anticipate that your taxable supplies in the next year won’t exceed the amount of £1,350,000. Also, you have to be up to date with your VAT payments and your business can’t be a division or a part of another company or group of companies. You can join the scheme anytime you want.

Advantages of the annual VAT accounting scheme

The fact that you only have to complete one VAT return per year can significantly reduce the amount of VAT compliance and administrative work, and you also benefit from having an extra month for submission and payment of the (annual) VAT return. Another major advantage is that you can prepare the VAT return at the same time you prepare the annual accounts, and it can help you manage your cash flow.

Disadvantages of the annual VAT accounting scheme

The regular payments are based on the last year’s liability and may be higher than necessary if the turnover has fallen, but the payments can be reduced if there is a bigger difference. Another disadvantage may be that you can have difficulties in remembering some transactions if you don’t keep your paperwork in order for the whole year. Also, in case of bigger seasonal or other variations, the effect on the cash flow may be the opposite of what you expected.

Making VAT payments

If you join this scheme, you can choose to make nine monthly interim payments, but you can also choose to make payments quarterly, according to what suits your business. If you stick with the nine interim payments, as most businesses that joi this scheme do, each payment will be set at 10% of the total amount of VAT paid in the last year to HMRC. But if you choose to pay VAT by quarterly you will make three payments of 25% each, also based on the last year’s VAT liability.

Leaving the scheme

You have the option to leave the annual VAT accounting scheme anytime you want, all you have to do is notify HMRC, usually at the end of your next VAT accounting period. Also, if your VAT taxable turnover exceeds £1.6 million, you must leave the annual VAT accounting scheme.

HMRC can also choose to remove your business from the scheme in some cases, for example if you have calculated VAT incorrectly, you have been convicted of a VAT offence or you have received a penalty for VAT evasion. Remember that if you choose to leave the annual accounting scheme your business is unable to rejoin it for at least 12 months.

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