Annual accounting for VAT

Some businesses choose to select the VAT Flat Rate Scheme to simplify their VAT reporting obligations. If you opt to choose Annual accounting for VAT, this is another method of potentially reducing the administrative burden.   

Annual accounting for VAT

Overview

Usually, most VAT-registered businesses submit their VAT Returns and payments to HM Revenue and Customs quarterly. Whilst opting to use Annual accounting for VAT you avoid the necessity of filing quarterly VAT returns, there are other considerations to consider which we discuss below.

How does Annual accounting for VAT operate?

If you use the Annual accounting for VAT scheme you:  

  • You make advance VAT payments towards your VAT liability - based on your last return submitted (or this is estimated if you’re newly VAT registered)
  • Submit one VAT Return a year

When you submit your annual VAT Return you either:

  • Make a final payment. This is effectively the difference between your advance payments and your actual VAT liability
  • You can apply for a VAT refund, if you’ve overpaid on your VAT liability 

How to join and leave the Annual accounting scheme

You can apply to join the scheme online when you register for VAT or at a later date. Confirmation you’ve joined the scheme is sent to your VAT online account. You can leave the scheme at any time, but you must leave if you’re no longer eligible to be in it.

You must leave the scheme if you’re no longer eligible to be in it (see below) or your VAT taxable turnover is (or is likely to be) more than £1.6 million at the end of your annual accounting year.

To leave the scheme, write to HMRC at the address below and they will confirm when you can leave. From this date, you must account for your VAT in the usual way.

BT VAT
HM Revenue and Customs
BX9 1WR

Who is eligible to use the scheme?

You can join the Annual Accounting Scheme if you're a VAT registered business and your estimated VAT taxable turnover is £1.35 million or less in the next 12 months. Just to clarify, the VAT taxable turnover is the total of everything sold that isn’t VAT exempt.

However you can’t use the scheme if you left the scheme in the last 12 months, your business is part of a VAT registered division or group of companies, you’re not up to date with your VAT Returns or payments or you’re insolvent.

Conclusion

Whilst annual accounting may reduce your administrative burden it is not suitable for every business. You therefore need to think carefully about any decision to join the scheme. For example, the scheme won't suit your business if you regularly reclaim input VAT because you’ll only be able to get a refund annually (when you submit the VAT Return).

For more useful information, check out our Ebooks here.

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