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Introduction to this document

Annual accounting scheme cover letter

If your business completes VAT returns, you could be eligible to join the annual accounting scheme to simplify your reporting.

Annual accounting

The annual accounting scheme allows for the submission of a single VAT return for the whole year, rather than the usual four. Your business makes fixed payments throughout the year, based on the previous year’s liability, with any shortfall (or excess) then reconciled upon submission of the return.

Aside from the simplified reporting, you will know what your instalment payments are going to be in advance, meaning you can budget for them. It also smooths the payments throughout the year, which is very helpful for seasonal businesses, especially as you can choose your own annual VAT period.

The majority of businesses which expect to have taxable supplies of up to £1,350,000 (not including VAT) in the next twelve months are eligible.  In order to assess this you will need to use a reasonable method to estimate your future turnover.

Instalments

You are required to make nine instalments equal to 10% of the previous year’s annual VAT liability. The first payment is due at the end of the fourth month of your VAT year, and then at the end of each subsequent month up to and including the twelfth. The annual return is made, with any balance of VAT payable, by the end of the second month following the end of your VAT year. This is also the deadline for submitting the annual VAT return.

Example. Jenny is using annual accounting, and has a VAT period ended 31 December 2017. Her VAT liability for the prior year was £100,000. She will need to make payments as follows:

By the end of

Amount due

January 2017

N/A

February 2017

N/A

March 2017

N/A

April 2017

£10,000

May 2017

£10,000

June 2017

£10,000

July 2017

£10,000

August 2017

£10,000

September 2017

£10,000

October 2017

£10,000

November 2017

£10,000

December 2017

£10,000

Jenny submits her VAT return on 1 February 2018, with the total VAT due being £120,000. She will need to pay the balance of £30,000 by 28 February 2018, and her payments for 2018 will increase to £12,000 per instalment.

 

Procedure

You must apply to HMRC using Form VAT 600AA before you can start using annual accounting. If your application is approved by HMRC, you will be able to use the scheme from the first day in the period that your application is accepted. The annual VAT period ends twelve months after you start to use the scheme. However, you can request a different period, in which case the first VAT return period will be shorter than twelve months so that the second and subsequent periods will end on the date you chose.

Example. Your current quarterly return starts on 1 July and ends on 30 September. You apply to join the annual accounting scheme on 11 August and want a year end of 31 December. The first day of your annual accounting year will be 1 July and it will end six months later on 31 December. You can’t make it end on 31 December of the following year, as that would result in the return being 18 months long.

HMRC will write to you confirming the amount and due dates for your interim payments, the method you have chosen to pay these, and the due date for the VAT return and balancing payment.