With standard VAT accounting, you are expected to complete four VAT returns throughout the year, one every three months. VAT is then paid or repaid upon receipt of the VAT returns.
With the Annual Accounting Scheme (AAS) for VAT, you would only complete one VAT return for the whole year and VAT is paid in monthly or quarterly instalments, drastically reducing the amount of paperwork that needs to be completed.
VAT is paid in advance using the previous year’s VAT to calculate the amounts for the instalments. For example, if you paid £10,000 in VAT in the previous year, you would either pay instalments of £1,000 per month over nine months or £2,500 each quarter. The final balancing payment is made upon completion of the next VAT return, or if you have overpaid in the instalments, a repayment would be issued. All payments must also be made electronically.
The return itself is almost the same as normal VAT returns, except that they account for the whole year, and there is a section for deducting any instalments paid.
Joining the Annual Accounting Scheme
To use the AAS your estimated annual VAT taxable turnover must not be more than £1.35 million. If you are already using AAS then you can continue to do so until your VAT taxable turnover increases to more than £1.6 million. VAT taxable turnover is the amount of turnover that can have VAT charged on it at any rate, not including the VAT itself.
If you are registering for the AAS within the first twelve months of your VAT registration, an estimate of the amount of VAT you will pay will be used to calculate the amount of the instalments you pay.
In addition to the turnover restriction, you cannot use the AAS if you are registered for VAT as part of a division or group of companies who do a combined VAT return, have used the AAS in the last twelve months or are not up to date with your VAT payments.
To join the AAS then you just need to download and complete this form.
Advantages of the Annual Accounting Scheme
You complete one return per year instead of four; this reduces the paperwork and time spent on filing VAT returns. You also have two months to complete the return instead of the one month you have with standard accounting.
In addition, knowing in advance how much VAT you will be paying per month/quarter means you can have a better idea of your cash flow in the future rather than as and when you complete the VAT returns. You can even make extra payments when you like to help reduce the balancing payment at the end of the year.
Disadvantages of the Annual Accounting Scheme
If you normally receive regular repayments throughout the year you will have to wait until the end of the year to receive the repayments using the AAS. In the same effect, if your turnover decreases dramatically you will still have to pay the same VAT as before, and wait until the end of the year for a repayment.
Leaving the Annual Accounting Scheme
You are able to leave the scheme at any time by notifying HM Revenue and Customs (HMRC), however you must leave if your VAT taxable turnover exceeds £1.6 million. HMRC may also remove you from the AAS if you exceed £1.6 million in VAT taxable turnover, calculate your VAT incorrectly or if you suffer a conviction for a VAT offence or penalty for VAT evasion.
Using the Annual Accounting Scheme with other Schemes
The AAS can be used with either the Cash Accounting Scheme or the Flat Rate Scheme providing you fulfil the requirements for each scheme. The cash accounting scheme can be used without notifying HMRC, however to use the flat rate scheme in addition, you will have to register using this form. You can even register for both schemes at the same time with this form.
If you would like any assistance or additional advice regarding the above, please do not hesitate to contact us.