DMS Posts

Annual accounting – how to make it work for you

A business associate says that his firm uses VAT annual accounting to help with its cash flow. What are the conditions for joining the scheme and can it offer you the same cash-flow advantages?

Annual accounting

As the name suggests, VAT annual accounting is an HMRC scheme that allows you to submit a single VAT return each year instead of the usual four. That alone makes the scheme attractive, but it also means you pay fixed VAT payments plus an annual balancing payment. Monthly payments are the norm, but you can ask HMRC to go quarterly.

Choose your date carefully

The annual accounting scheme rules allow you to choose the starting point for your annual return. Picking the right date to suit your business can give you a cash-flow advantage.

Tip. If your trade is seasonal, choosing an annual return period that starts at the beginning of the seasonal boom gives you the best result.

Example. Bill and Ben own three restaurants in seaside towns. 75% of their £800,000 (excluding VAT) annual turnover occurs in July to September. Before annual accounting they made VAT returns for calendar quarters meaning that £120,000 of their annual VAT was payable at the end of October each year, while the remaining £40,000 was spread over the other three VAT quarters.

They applied for an annual accounting year starting on 1 July. This meant their VAT bill in October was just £40,000 which allows them to hang on to the difference of £80,000 (£120,000 -£40,000) an extra three to nine months.

The annual return and payment

When you’re in the scheme your monthly or quarterly payments are based on your VAT bill for the previous twelve months. This means if your turnover is growing you gain another cash-flow advantage.

Example. In the first year of using the scheme Bill and Ben’s turnover increased so that their annual VAT bill rose to £200,000. However, their first three quarterly payments in the second year remain at £40,000. Of course, they must pay the difference and this is due one month after making their annual return, which must be submitted by 31 July. Their VAT payments for their third year in the scheme are based on their second year and so are £50,000 per quarter.

Beware a reducing VAT bill

If the VAT payable for a year is less than the previous one, say because of falling turnover or increased purchases, your fixed payments under the annual accounting scheme will exceed your actual liability. If you think that’s going to happen you can apply to HMRC to reduce your payments.

Joining the scheme

You can apply to HMRC to use the annual accounting scheme if you expect to make VATable supplies of up to £1,350,000 (excluding VAT) in the next twelve months (see The next step ). But you can’t apply if you’re registered for VAT as part of a group, have stopped using annual accounting in the previous twelve months or owe VAT which is overdue.

Your expected VATable supplies over the next twelve months must not be estimated at more than £1,350,000 (excluding VAT) and your business must not be part of a VAT group registration. You can usually gain a cash-flow advantage if your business income is growing or is seasonal.