VAT-registered businesses have two submission options for their returns. The quarterly option where they submit their VAT returns and payments to HM Revenue and Customs four times a year. The second is where HM Revenue and Customs offer an Annual Accounting Scheme for businesses with a taxable turnover of £1.35 million or less.

Let’s look at this scheme in more detail and ask why you might or might not want to consider it for your business.

Here is how the Annual Accounting Scheme (AAS)works:

• Eligibility: Businesses with an estimated taxable turnover of £1.35 million or less can usually join AAS.
• Annual VAT Return: Instead of filing quarterly VAT returns, you submit only one VAT return annually. The return covers the entire accounting period, usually 12 months.
• What you pay: Your business would make either nine monthly or three quarterly interim payments towards its VAT bill throughout the year. These payments are based on an estimate of what the annual VAT bill will be.
• Payment Adjustments: At the end of the accounting period, you deduct the VAT payments already made from the amount of VAT shown to be owing on the VAT return. If there’s a shortfall, you must pay the remaining balance amount. If there’s been an overpayment, you can either offset the amount against the following year’s liability or request a refund.
• How to apply for AAS : You apply for the scheme through HMRC. Once in AAS you stay until you decide to leave voluntarily or your business goes over the turnover threshold.
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Why might AAS be good for you?

You might opt to use AAS for several reasons:

• Reduced administration: You only have to submit one VAT return annually, instead of four, one every quarter.
• Improved cashflow management: The easily calculated schedule of making fixed monthly or quarterly payments, rather than fluctuating payments each quarter, can help with budgeting and financial planning.
• Less chance of a penalty: With just one VAT return to submit in a year there is less chance of missing the filing or payment deadline, which can result in a financial penalty.
• Consistency in VAT reporting: If your business has relatively stable or predictable VAT liabilities, the scheme offers uniformity in VAT reporting,  and simplifies the compliance work reducing the need for frequent adjustments.
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Why might you not want to use AAS?

While AAS offers benefits, there are reasons why it may not be a good for your business.

• Overpayment: Under AAS, the monthly or quarterly payments are all fixed in advance based on an estimate. If the actual VAT liability is lower than estimated, then you will be overpaying VAT throughout the year thus tying up funds that could be used elsewhere.
• Cash flow impact: While AAS offers a set payment schedule, this may cause a strain on cash flow if you have fluctuating or seasonal sales.
• Lack of flexibility: If you experience significant increases or decreases in sales, then there is limited flexibility in adjusting VAT payments throughout the year. You may  find yourself with a heavy final payment causing you to experience cash flow problems.
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As you can see, whether or not AAS could work for you depends on your business. For some businesses, the scheme can offer significant benefits, whereas others may find that traditional quarterly VAT reporting better suits their requirements.

Please contact us if you would like advice on whether the VAT Annual Accounting Scheme is right for you, we will be happy to help.