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Blog VAT Accounting Schemes – The VAT Annual Accounting Scheme

VAT Accounting Schemes – The VAT Annual Accounting Scheme

22 August 2014

In this second of three brief guide looking at the 3 main VAT accounting schemes we look at how the VAT Annual Accounting scheme can assist small businesses.

The VAT Annual Accounting scheme

The scheme was introduced at the same time as Cash Accounting and has the same turnover thresholds for joining and leaving it. It involves making pre-agreed payments on account and completing only 1 VAT return per year. So its purpose is to aid cashflow and budgeting.

For those wishing to join the scheme who have been VAT registered for less than a year, the taxable turnover for the purpose of the scheme is usually the amount shown on the application to register. In any case, the value of capital asset sales or anticipated sales is ignored.

An application form must be completed in order to join the scheme. Businesses that apply to register for VAT online can apply online to use the VAT Annual Accounting scheme if the application is submitted at the same time.

Withdrawal from the scheme is possible at any time by application in writing to the business’s local VAT office.

AdvantagesBenefits of AA:

• only 1 VAT return is required each year, with an extra month for submission

• the return can be prepared at the same time as the annual accounts

• cashflow is known in advance

• monthly payments spread the load

• it simplifies the operation of retail or partial exemption schemes.

Sometimes the regular payments set for a subsequent year can be unreasonably high but, if the difference is significant, a reduction can be negotiated. Seasonal variations can also have an impact either way.

The regular budget payments are usually:


  • 9 monthly interim payments of 10% of the previous year’s VAT payments (or 10% of their estimated payments if registered for less than a year), commencing on the last day of the fourth month of the VAT year, or
  • 3 quarterly interim payments of 25% of the previous year’s VAT payments (or 25% of their estimated payments if registered for less than a year).

The monthly method is the default unless the business specifically requests quarterly payments.

Payments can be adjusted to allow for any expected changes in turnover and trading. The annual return then shows actual VAT due for the year then ending and the balance, if any, of that amount, less the budget payments already made, is due no later than 2 months after the return date. Payments must be made by direct debit, or by a choice of electronic payment methods.

Failure to comply with the scheme rules, or general non-compliance with other VAT rules can result in expulsion from the scheme.

Our next article in this series will be published on 29 August 2014 and will be covering the Flat Rate Scheme.

If you feel your business could benefit from the Annual Accounting scheme or would just like to speak to someone to find out a little more then please call Lee Taylor on 01206 512476 or email by clicking here.