Articles

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

XERO CERTIFIED ONLINE ACCOUNTANTS

We will link your business bank account to Xero software. All your income and expenses will feed directly in to Xero. This saves you time in preparing your year end paperwork, and you can even store your documents in Xero