Blog

Tuesday 14th August 2018

Is it better to do an annual VAT return?

The standard VAT return period covers 3 months, so you normally submit 4 VAT returns per year. The annual scheme means you only have to submit one return per year.

How does the annual VAT scheme work?

  • you make advance VAT payments during the year towards your VAT bill - based on your last return (or estimated if you’re new to VAT)
  • payments can be monthly or quarterly, starting in the 4th month of your VAT accounting year.
  • you submit one VAT return within 2 months of the year end
  • you make a final payment of the balance due, at the same time as submitting the return. If you have paid too much, you will get a refund from HMRC.

Advantages

  • Fewer deadlines – 1 per year instead of 4. 
  • If a business has fallen into the expensive VAT surchages, changing to the annual scheme will limit the risk of further surcharges occuring.  As there is only 1 payment deadline, only 1 surcharge can be applied rather than 4 within one year.
  • Payment by direct debit – a predictable monthly amount can be really useful for cashflow
  • Likely to be lower costs for administration and accountancy
  • If your VAT bills are increasing each year, then you delay some of your VAT payments, because your payments are based on the previous year’s bill.  This is great when a business is growing and needs to retain extra cash within the business

Disadvantages

  • You may pay too much during the year, and you’ll only receive a refund of the difference after the end of the year.
  • You may be tempted to leave all your VAT bookkeeping until after the year end, and then have a huge task to complete before the deadline.
  • If your VAT bills are increasing, you may end up with a large final VAT payment that you hadn’t planned for, because you only work out your actual VAT bill after the end of the year.
  • If you’re reclaiming VAT, its better to be submitting returns quarterly, or even monthly, to get your VAT back sooner.

Example
Seaside Limited paid £9,000 of VAT in total to HMRC for the year ended 31 December 2017. They converted to the annual accounting scheme from 1 January 2018.

  • They paid £900 per month (10% of last years bill) from April to December 2018 – a total of £8,100.
  • They submitted their VAT return in February 2019, with a total of £10,000 due to HMRC.
  • They paid the balance of (£10,000 - £8,100) £1,900 to HMRC at the end of February 2019.
  • They then will start to pay £1,000 per month from April 2019

How to join the scheme

Registering for VAT for the first time: apply on line with your VAT registration.

Already registered: apply online here