Annual Accounting Scheme: Basic Guide for small business, sole trader and entrepreneurs.

VAT is only due on goods and services that are VAT taxable according to the HMRC. A business will only have a VAT liability (VAT due) due the HMRC if it charges its customers VAT.

When a business registers for VAT it will be required to return the VAT due to the HMRC. This is the remainder after the business calculates the all VAT amount it collects from it customers on behalf of the HMRC over a period of time usually quarterly (Output VAT) less the VAT amount it paid while purchasing goods and or services for itself (Input VAT).

If the business did not purchase any VAT liable goods and or services within this period it doesn’t need to claim a VAT rebate and the whole of the VAT is collects from its customers is automatically due to be paid to the HMRC.

What is the Annual Accounting Scheme?

The annual accounting scheme is a method whereby businesses pay in the VAT due on account to the HMRC in 9 monthly instalments throughout the year or in 3 quarterly payments throughout the year. These payments are usually based on previous year’s VAT return. If your business has been trading (i.e. been selling goods and or services) less than a year, the VAT due will be based on what the HMRC predicts your VAT due to be depending on your business circumstances.

Who is allowed to use the Annual Accounting Scheme?

• Those who are using the Annual Accounting Scheme for the first time and whose estimated/forecasted VAT taxable income/turnover are less than £1.35million in the coming year. VAT taxable income/turnover means total amount of money a trading business receives as a result of supplying any goods and or services that is subject to any type of VAT.

• The VAT charged is not counted as part of the VAT taxable income/turnover because it charged on top of the original final price of goods/services! Once you have started using the Annual Accounting Scheme, you can keep using it until your VAT taxable income/turnover reaches £1.6million and doesn’t exceed this amount!

Please note that there are businesses that supply/sell goods and or services that are a mixture of VAT taxable items and those that are not (i.e. a wide range of products). The VAT taxable income referred to above is only applicable to VAT taxable item(s) your business sell, even if it is only one product /service you offer to your clients!

Who is NOT allowed to use the Annual Accounting Scheme?

• Trading businesses that have an estimated VAT taxable income/turnover of more than £1.35millon per annum.

• Businesses that are insolvent. This means the business is bankrupt !

• Businesses that are still owing the HMRC VAT due payments

• Businesses that are registered for VAT as part of a group of companies or as a division of a company

• If the business has previously used Annual Accounting Scheme in the last 12 months

For more information on Annual Accounting Scheme, please see my other guides for advantages and disadvantages of this scheme and how to come out of the Annual Accounting Scheme!