For most VAT-registered businesses in the UK, the standard process involves submitting VAT Returns and making payments to HMRC every quarter. While this suits many businesses, it can feel like a constant administrative burden for smaller operations. Enter the Annual Accounting Scheme—a simplified VAT system designed to ease the compliance process for eligible businesses.
Overview
The Annual Accounting Scheme streamlines VAT obligations by allowing businesses to:
- Make advance VAT payments throughout the year, either based on their previous return or an estimate (for new businesses).
- Submit a single VAT Return per year, instead of four.
From 1 April 2019, under the Making Tax Digital (MTD) initiative, most businesses must also maintain digital VAT records and use compatible software to submit their VAT Returns electronically.
At the end of the accounting year, when the annual return is filed, you’ll either:
- Pay any outstanding VAT if your advance payments were too low, or
- Receive a refund if you’ve overpaid.
Important: If your business regularly reclaims VAT, this scheme might not be suitable. Since refunds can only be processed annually, you may face cash flow delays.
You can apply for the scheme if your estimated VAT taxable turnover is £1.35 million or less. Consulting a tax adviser is highly recommended to ensure this scheme suits your business’s financial rhythm.
Eligibility Criteria
To join the Annual Accounting Scheme, your business must:
Be VAT-registered, and have an estimated VAT taxable turnover of £1.35 million or less over the next 12 months.
VAT taxable turnover includes all VATable sales but excludes VAT-exempt items.
You’re not eligible if:
- You’ve left the scheme in the last 12 months.
- You are part of a VAT group or division.
- You have outstanding VAT Returns or unpaid VAT.
- Your business is insolvent.
When You Must Leave:
- If you become ineligible during the year.
- If your turnover exceeds £1.6 million (or is expected to) during your accounting period.
How to Join or Exit the Scheme
If You’re Not Yet VAT Registered:
You can register for VAT and opt into the Annual Accounting Scheme at the same time. HMRC provides guidance during the VAT registration process.
If You’re Already VAT Registered:
You can join the scheme:
- Online, via your HMRC VAT account, or
- By post, using HMRC’s application form.
Tip: If your VAT-exclusive turnover is £150,000 or less, consider the Flat Rate Scheme as well. It allows you to pay VAT at a fixed percentage of turnover, offering additional simplicity.
Final Thoughts
The Annual Accounting Scheme can significantly reduce the paperwork and administrative hassle for eligible businesses. But like any tax scheme, its benefits depend on your cash flow patterns and VAT profile. If you’re thinking about switching to this scheme, speak to your accountant to evaluate if it’s the right move.
Simplicity in tax is rare—when it’s available, it’s worth exploring. Connect with AccelUS to know more!
