Using standard VAT accounting, you must complete four VAT Returns each year. Any VAT due is payable quarterly, and any VAT refunds due to you are also repayable quarterly.
Using annual VAT accounting, you make nine interim payments at monthly intervals, or three quarterly interim payments, throughout the year. You only need to complete one return at the end of the year when you either make a balancing payment or receive a balancing refund. Annual accounting can reduce your paperwork and make it easier to manage your cashflow.
You can use annual accounting if your estimated VAT taxable turnover during the next tax year is not more than £1.35 million. If you are already using annual accounting you can continue to do so until your estimated VAT taxable turnover exceeds £1.6 million.
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Using standard VAT accounting, you must complete four VAT Returns each year. Any VAT due to HM Revenue & Customs (HMRC) is payable quarterly, and any VAT refunds due to you are repayable quarterly.
Using the Annual Accounting Scheme, you make either nine interim payments at monthly intervals, or three quarterly interim payments, throughout the year. You only need to complete one return at the end of each year. At that point you must pay any outstanding amount. If you have overpaid, you will receive a refund.
If you have been registered for VAT for less than 12 months, your interim payments are based on an estimate of the VAT you expect to owe for the coming year. If you have been registered for VAT for 12 or more months, your interim payments are based on your previous year's actual VAT payments.
You can use the Annual Accounting Scheme if your estimated VAT taxable turnover for the coming year is not more than £1.35 million. Your VAT taxable turnover includes any standard, reduced and zero-rated sales and other VAT taxable supplies, but excludes the VAT itself, VAT-exempt supplies and capital asset sales.
Once you are using annual accounting you can continue to do so as long as your estimated VAT taxable turnover remains below £1.6 million.
You cannot use annual accounting if:
There are a number of reasons why the Annual Accounting Scheme can be beneficial to your business, but there are also some potential disadvantages.
If you use HMRC's online services to apply for VAT registration, you can apply to join the Annual Accounting Scheme at the same time.
You can also download and complete an application form and send it to HMRC by post.
form VAT 600 AA to apply to join the Annual Accounting Scheme
Get form VAT 600 AA/FRS for joining the Annual Accounting Scheme and the Flat Rate Scheme at the same time
Find out more about the Flat Rate Scheme
Once you have joined the Annual Accounting Scheme you must notify HMRC if there are significant changes that may affect the amount of VAT you pay. Examples include:
You may leave the scheme voluntarily at any time by notifying HMRC.
You must leave the scheme if your VAT taxable turnover goes over £1.6 million. HMRC may remove you from the Annual Accounting Scheme for a number of reasons, including:
If you leave the Annual Accounting Scheme, you can't rejoin for at least 12 months.
If you choose to pay your VAT by nine monthly instalments, each payment will be 10 per cent of the total amount of VAT you paid to HMRC in the previous year, or 10 per cent of the estimated total annual amount of VAT due to HMRC if you have been registered for VAT for less than 12 months. Your payments will be due by the end of months 4 to 12 of your annual accounting year.
If you choose to pay your VAT by three quarterly instalments, each payment will be 25 per cent of your previous year's VAT liability, or 25 per cent of your estimated VAT liability if you have been registered for VAT for less than 12 months. Your payments will be due by the end of months 4, 7 and 10 of your annual accounting year.
The balance of your actual VAT payable for your annual accounting year, based upon the return that you complete at the end of the year, is due two months after the end of your annual accounting year.
All of your payments must be made electronically.
Annual returns are completed in exactly the same way as quarterly returns, except that after calculating the annual VAT payment due, you deduct the interim payments you have already made to arrive at the end-of-year balancing payment due to you or HMRC.
The standard rate of VAT was increased from 17.5 per cent to 20 per cent on 4 January 2011.
You may be able to use the Annual Accounting Scheme together with some of the following VAT schemes:
Unlike standard VAT accounting where VAT is due when you issue an invoice, using cash accounting you don't have to pay VAT until your customers pay you.
Using the Flat Rate Scheme you simply pay a fixed percentage of your turnover as VAT.
If you are a retailer, there are several schemes where you can simplify your calculation of VAT by not having to account for VAT on each individual sale.
If you buy or sell second-hand goods, antiques, collectibles or art, you only need to account for VAT on the difference between the price you paid for an item and the price at which you sell it - your margin.
The Tour Operator's Margin Scheme makes VAT accounting easier for tour operators who buy and sell travel, accommodation and certain other services internationally.