VAT-registered businesses normally submit their VAT returns and payments to HM Revenue and Customs 4 times a year. However, HM Revenue and Customs also offer an Annual Accounting Scheme for businesses with a taxable turnover of £1.35 million or less.
In this article we will look at what this scheme is and why you might or might not want to consider it for your business.
How does the Annual Accounting Scheme work?
Here is how the scheme typically works:
-Eligibility: Businesses with an estimated taxable turnover of £1.35 million or less can usually join the scheme.
-Annual VAT Return: Instead of filing quarterly VAT returns, you submit only one VAT return annually. The return covers the entire accounting period, usually 12 months.
-Payments: Your business would make either nine monthly or three quarterly interim payments towards its VAT bill throughout the year. These payments are based on an estimate of what the annual VAT bill will be.
-Adjustments: At the end of the accounting period, you deduct the VAT payments already made from the amount of VAT shown to be owing on the VAT return. If there’s a shortfall, you pay the remaining amount. If there’s been an overpayment, you can either offset the amount against the following year’s liability or request a refund.
-Application: You apply through HMRC. Once in the scheme you stay until such time as you voluntarily leave, or your business goes over the turnover threshold.
Why might the scheme be good for you?
You might opt to use the VAT Annual Accounting Scheme for several reasons:--Reduced administrative work: You only have to submit one VAT return annually, instead of four.
-Improved cashflow management: The predictable schedule of making fixed monthly or quarterly payments, rather than fluctuating payments each quarter, can help with budgeting and financial planning.
-Less chance of a penalty: With just one VAT return to submit in a year there is less chance of missing a filing deadline, which could result in a financial penalty.
-Consistency in VAT reporting: If your business has relatively stable or predictable VAT liabilities, the scheme offers consistency in VAT reporting, simplifies the compliance work, and reduces the need for frequent adjustments.
Why might you not want to use the scheme?
While the scheme offers some benefits, there are also reasons why it may not be a good fit for your business.
-Potential overpayment: Under the scheme, the monthly or quarterly payments are all fixed in advance based on an estimate. If the actual VAT liability is lower than estimated, then you will be overpaying VAT throughout the year and tying up funds that could be used elsewhere.
-Cash flow impact: While the scheme offers a predictable payment schedule, this may cause a strain on cash flow if you have fluctuating or seasonal sales.
- Lack of flexibility: Similarly, if you have a significant increase or decrease in sales, then there is limited flexibility in adjusting VAT payments throughout the year. You may therefore find yourself with a heavy final payment or running into cash flow problems.
-Loss of interest on overpayments: If you find you have an overpayment at the end of the year, no interest will be paid on the refund, whereas interest could have been gained by holding the funds elsewhere.
As you can see, whether or not the annual accounting scheme could work for you depends on your business. For some businesses, the scheme can offer significant benefits, whereas others may find that traditional quarterly VAT reporting better suits their requirements.
April 4, 2024