Spreading the Cost of VAT for Clients

Is your client one of those who repeatedly say that they want to pay tax "little, and often"? Because there are a number of ways they can do just that.

From April this year the turnover threshold for the VAT Annual Accounting Scheme doubles from £660,000 to £1.35m, as announced in the 2005 Pre-Budget report.

This increase is also likely to apply to the Cash Accounting Scheme next year, subject to European Commission approval.

Annual Accounting is sometimes regarded as the Cinderella of VAT schemes - although more than a million businesses are invited, only about 10,000 think they can go to the ball. Many businesses see the only advantage is only having to complete one VAT return instead of four. Big deal, they might think.

But that overlooks the key advantage to Annual Accounting Scheme: effective cashflow management. Small businesses live or die by cashflow, and regularly look for ways to spread the tax burden more evenly throughout the year. Annual Accounting does precisely that - providing for nine payments throughout the year, and a balancing payment or refund with the annual return.

So why is Annual Accounting not used more? Some tax advisers see the quarterly VAT return as an aid to business discipline, or envision a shopping bag-full of invoices at year's end. Other businesses might think they'd be irreversibly committed to fixed payments in the case of a downturn, or end up facing an alarming balancing figure if the business grows.

However there is great flexibility within the Scheme. Instalments can be changed to further manage cashflow demands, and also top-up payments can be made if a business is seasonal, or finds itself unexpectedly cash-rich.

Although awareness of the Annual Accounting Scheme is low - with many people confusing it with "annual accounts" or annual direct tax returns - there are real advantages to small businesses who want to pay their tax "little, and often".