VAT annual accounting
The VAT annual accounting scheme seems like a good idea, as you don’t have to submit quarterly VAT returns. Instead you pay your VAT by monthly or quarterly instalments during the year, and make a final balancing payment with a single VAT return for the whole accounting year.
If you choose to pay monthly instalments, these will be set at 1/10th of your previous year’s VAT liability. Nine monthly payments are made (starting in the fourth month of your VAT year), plus a balancing amount for the year paid in the second month of the next year.
However, the discipline of reviewing your accounts every quarter is lost. When you don’t have time to monitor your accounts, the final balancing payment may be a lot more than you expect.
When you use the VAT annual accounting scheme, you have two months to submit the annual VAT return after the end of the accounting year. If that return is late, HMRC will send you an estimated VAT bill which may be less than the true liability. If insufficient VAT is paid, penalties will be due.
Annual accounting can suit businesses which have regular predictable income; those with very variable income can end up paying too much or too little VAT.