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Businesses which register for VAT will normally need to submit a VAT return four times a year. The rules are a bit different if you register for VAT Annual Accounting though. As the name suggests, you’ll submit an annual return to account for your VAT, and make advance payments towards your bill throughout the year.

 

 

How often will I need to make advance payments on my VAT Annual Accounting bill?

If you register to the VAT Annual Accounting scheme you can choose to make advance payments in either monthly or quarterly intervals, and a final payment when you submit your VAT return.

 

Payment Intervals Deadline for Payment Instalment amount
Monthly payments The end of months 4, 5, 6, 7, 8, 9, 10, 11 and 12 10% of your estimated VAT bill
Quarterly payments Due at the end of months 4, 7 and 10 25% of your estimated VAT bill
Final payment Within 2 months of month 12 A balancing payment if VAT is still owed

How much are my VAT Annual Accounting instalments?

The amount you pay for each instalment towards your final VAT bill depends on your VAT return from the previous year. If you’re in your first year of VAT registration, you’ll pay an estimated amount. Each instalment will be 10% of your estimated VAT bill if you pay monthly, and 25% if you make quarterly payments.

The final payment is a ‘balancing payment’ to pay any VAT due once you submit your VAT return for the year. You’ll need to pay the balancing payment within two months of your VAT year ending.

What happens if I overpay on the VAT Annual Accounting scheme?

Don’t worry if you reach the end of your VAT year and discover that your advance payments are more than the final bill. If you overpay your VAT bill, you can apply for a refund.

 

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Who can use the VAT Annual Accounting Scheme?

Your business can join the VAT Annual Accounting Scheme if your estimated VAT taxable turnover is £1.35 million or under for the next 12 months. This figure excludes the value of any sales you expect to make from capital assets.

There are some exceptions to those who can use the scheme. Business can’t use the VAT Annual Accounting Scheme if:

It’s also worth noting that HMRC can force you to leave the scheme if you don’t submit your VAT return or pay your bill on time.

What are the pros and cons of the Annual Accounting Scheme?

As with any business decision, there are both advantages and disadvantages to signing up for VAT Annual Accounting.

 

The benefits of VAT Annual Accounting The disadvantages
You won’t need to submit your VAT return as regularly, which can ease some of the admin burden. You must tell HMRC if your VAT liability is likely to be significantly higher or lower than the previous year.
You have an extra month to complete your VAT return and pay the bill. It may not be beneficial if you claim back VAT regularly, as you’ll only be able to claim a repayment once a year.
It can help simplify the process so it’s easier to understand, as you will be paying a set sum each month or quarter. There is a risk of making overpayments. Your payments use the previous year’s return, so even if turnover is lower, you’ll still pay the previous year’s rate. You won’t be able to reclaim the overpayment until the end of the year.

Joining and leaving the Annual Accounting Scheme

You can sign up for the scheme online, or by submitting a VAT600AA form to HMRC. In some instances you can only apply by post (rather than online), such as when applying for a registration exception.

You must leave the scheme if you’re no longer eligible to be in it. For instance, if turnover exceeds £1.35 million, or if any of the other exceptions to eligibility apply. You can also leave the scheme voluntarily if you want to.

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

There are a few differences between these schemes. As a starting point, it’s not possible to sign up for the VAT Cash Accounting Scheme and the Flat Rate Scheme at the same time.

The FRS has its own cash-based turnover and you pay a fixed rate of VAT, keeping the difference between what you charge customers and what you pay HMRC.

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

With the Cash Accounting Scheme, you only pay the VAT on a sale once the customer pays you. It works for supplier payments to, so you only reclaim VAT that you pay to a supplier once you actually pay them.
 

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

You can apply to the Annual Accounting Scheme at any time. Applying in the middle of an accounting period rather than at the beginning can delay the process.

Authorising your use of the Annual Accounting Scheme takes effect from the first day of the period that you make your application. So, if you apply towards the end of your accounting period after submitting 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? Our online accountants make sure your accounts work for you. Get an instant quote for our services here.

About The Author

Beth-Anne Bruce

I'm an experienced and fully AAT and ACCA qualified accountant, who is enthusiastic about helping business owners succeed. I also love cooking and needlepoint (at different times!). Learn more about Beth.

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