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A Guide to the VAT Annual Accounting Scheme

VAT Annual Accounting Scheme

Businesses who are registered for VAT will typically submit their VAT Returns four times a year to HMRC.

However, if you’re eligible (and it’s worth your while), you may opt to sign up to the VAT Annual Accounting Scheme. Under this scheme you will submit one annual VAT return (as the name suggests) opposed to four returns a year.

What does the scheme do?

Under the Annual Accounting Scheme you’re able to make payments towards your VAT bill in advance, breaking the process down into either monthly or quarterly payments. The amount you pay will be based on your VAT return of the previous year, or will be estimated if you’ve just begun paying VAT.

If you choose to make these advance payments on a monthly basis you’ll pay 10% of your estimated VAT bill with each payment. If you pay on a quarterly basis you will pay 25% of the estimated bill.

You’re required to complete one VAT return each yearn under this scheme and when you submit this you will make the final payment, also known as the balancing payment, which is paid two months after the end of your VAT accounting period. This payment will close the difference between the amount you have already paid and the total figure of the bill.

Alternatively, if applicable you may apply for a refund if you find that you’ve overpaid your bill.

Who can sign up?

Businesses who are registered for VAT that have an estimated VAT taxable turnover of £1.35 million or under within the next 12 months are able to join the VAT Annual Accounting Scheme. This figure excludes the value of any expected sales from capital assets.

There are some exceptions to those who can use the scheme. You will be unable to use the VAT Annual Accounting Scheme if:

  • You have left the scheme within the last 12 months
  • You are not up-to-date with your VAT payments or returns
  • Your business is part of a VAT registered division or group of companies
  • Your business is insolvent

It’s also worth noting that HMRC can choose to force you to leave the scheme if you fail to submit your VAT return by the deadline or if you fail to make any payments on time (unless this is beyond your control).

Pros and cons

As with any HMRC scheme, there are both advantages and disadvantages to signing up. Some advantages to joining the Annual Accounting Scheme are:

  • It reduces the workload
  • You have an extra month to complete your return and pay tax
  • It can help simplify the process so it’s easier to understand as you are paying a fixed sum each month or quarter
  • To pay you simply need to set up a direct debit. Alternatively, you may pay via a choice of electronic payments, which can make managing your monthly finances easier

On the other hand, there are disadvantages to the scheme for some:

  • You must tell HMRC if your VAT liability is likely to be significantly higher or lower than the previous year
  • It may not be beneficial if you claim back VAT regularly as you are only able to claim a repayment once a year
  • There is the potential for inaccurate payments as the figure is based on the amount paid in the previous year. For example, if your business’ turnover decreases you will still have to pay the previously agreed rate until the end of the year, when you are able to claim a refund

Some of these points will be more applicable to some businesses than others, which is why you should weigh up the pros and cons of the scheme in relation to your business’ needs rather than the overall benefits.

Joining and leaving the annual accounting scheme

If you decide that the scheme is something you’re interested in trying out and you’re eligible, you’re able to easily sign up online through HMRC’s website. You can do this when you register for VAT.

Alternatively you can apply by post by completing a VAT600 AA form. In some instances you will be required to apply by post, such as if you want to apply for a registration exception when registering.

You must leave the scheme if you’re no longer eligible to be in it, for instance if your turnover exceeds £1.35 million or if any of the other exceptions to eligibility listed above apply.

You may also choose to leave the scheme voluntarily if it simply isn’t something that works for you.

VAT Annual Accounting Scheme FAQs

Q: What’s the difference between the Flat Rate Scheme, the Cash Accounting Scheme and the Annual Accounting Scheme?

A: There are a few differences between these schemes. The first thing to recognise is that you cannot sign up to the Cash Accounting Scheme and the Flat Rate Scheme at the same time, you must choose one or the other.

The Cash Accounting Scheme works by calculating the liability from payments made and received, opposed to payments made and received. So you pay VAT on sales only when your customer pays you and you reclaim VAT on purchases only when you’ve paid your supplier.

However, if you use the Flat Rate VAT Scheme you aren’t able to use the Cash Accounting Scheme as the Flat Rate Scheme has its own cash-based turnover (although you don’t have to notify HMRC if you are using the Cash Accounting Scheme). Under this scheme you pay a fixed rate of VAT and keep the difference between what you charge customers and what you pay HMRC.

On the other hand, you can be signed up to the Annual Accounting and Flat Rate Schemes at the same time.

Q: Do I have to wait until the end of my VAT accounting period to register for the Annual Accounting Scheme?

A: You can apply to the Annual Accounting Scheme at any time, although waiting to apply until you’re in the middle of your accounting period rather than at the beginning could delay the process.

If you haven’t yet registered for VAT you can sign up to both the Flat Rate Scheme and the Annual Accounting Scheme at the same time.

HMRC will require time to process your application as authorising your use of the Annual Accounting Scheme will take effect from the first day of the period your application’s finished in. So, if you apply towards the end of your accounting period when you’ve already submitted the return for that period, there will be a delay.

Do you need help submitting your VAT returns or getting set up on the VAT Annual Accounting Scheme? Or trained accountants work with you to make sure your accounts work for you. Get an instant quote for our services here.

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