VAT: Annual Accounting Scheme 6th March 2015

Posted in: VAT

The annual accounting scheme allows small and medium sized taxable persons to pay VAT on an annual basis. They need only submit one VAT return and make estimated payments on account during the year with a final VAT payment at the year end.

Here’s how it works:

Ian works as an electrician and runs his own business. He is VAT registered. In the preceding 12 months he made taxable supplies of £120,000. He had costs of £70,000 on which VAT was reclaimed. Ian now registers for the annual accounting scheme. Over the course of the following year, Ian has taxable supplies of £140,000 and taxable expenses of £80,000.

We look at the VAT due on Ian’s trade in the preceding 12 months. It was:

Amount (net) VAT
Supplies 120,000 24,000
Expenses 70,000 (14,000)
VAT due 10,000

This gives us an estimate of Ian’s VAT due for the next 12 months.

We now take 10% of the VAT due:

£10,000 x 10% = £1,000

Ian now pays nine equal instalments of £1,000 in months 4 to 12 of the VAT year. The VAT year is the year ended 31 March, 30 April or 31 May depending on the stagger group the trader is in.

Ian will have paid 90% of the previous year’s VAT due over those 9 months. He now has to make his final payment:

Amount (net) VAT
Supplies 140,000 28,000
Expenses 80,000 (16,000)
VAT due 12,000
less: payments on account (9,000)
Final payment 3,000

Ian pays the balance of £3,000 when he submits his single annual VAT return by the last day of the second month following the year end.

Note that there is no filing extension for traders using the annual accounting scheme, but there is a two month time limit for filing the VAT return.

Businesses can apply to make 3 interim payments instead of 9, in which case they will pay 25% of the estimated tax in months 4, 7 and 10 of the VAT year, with the final payment in the 14th month.

If the business has not been registered for VAT for the previous 12 months, the VAT due will be estimated. The business can write to HMRC if it does not agree with the estimate and agree a different amount.

Joining the scheme

There are certain conditions that must be met before applying the annual accounting scheme:

  • the annual value of taxable supplies is expected to be less than £1,350,000 (excluding VAT)
  • the trader must not have ceased to operate the annual accounting scheme in the previous 12 months
  • the trader must not have been a member of a VAT group registration

Leaving the scheme

There are circumstances when a trader must leave the scheme:

  • where the annual value of taxable supplies exceeds £1,600,000
  • if at any time the trader believes his/her taxable supplies will exceed £1,600,000 s/he must inform HMRC and leave the scheme
  •  a trader must leave if s/he becomes insolvent, dies or ceases to trade

HMRC can remove a trader from the scheme if the trader fails to make returns, payments or submits false statements.

An advantage of the annual accounting scheme is that it may have cash flow advantages, especially in the situation where taxable supplies are increasing but costs are being kept under control and not rising to the same extent as the supplies.

Another advantage is that penalties for late returns are unlikely to be applied, since there is only the one return to make.