Annual accounting

HMRC Reference:Notice 732 (April 2014) View Change History
 

Contents

Foreword

1. Basics of the annual accounting scheme

1.1 What is this notice about?

1.2 What has changed from the previous version?

1.3 What is the annual accounting scheme?

1.4 How will the scheme help me?

1.5 What do I need to look out for if I use the scheme?

1.6 How do I join the scheme?

2. Conditions and eligibility of using the scheme

2.1 Am I eligible to use the scheme?

2.2 How do I work out the value of my taxable supplies for joining the scheme?

2.3 How do I know what my future taxable supplies will be?

2.4 What if the value of my taxable supplies goes over £1,350,000 per year?

2.5 What if I estimate that the value of my taxable supplies will not go over the limit in the coming year and I am wrong?

2.6 Who cannot join the scheme?

2.7 Are there any conditions to using the scheme?

2.8 Can I use the annual accounting scheme with any of the other VAT schemes?

3. How the scheme works

3.1 What is the basic idea of the scheme?

3.2 When will my annual accounting year start?

3.3 When will my annual accounting year end?

3.4 Will my annual accounting period always be 12 months long?

3.5 Can I change my annual accounting year end once I am in the scheme?

3.6 What is the due date for my return?

3.7 Do I have to apply to join the scheme each year?

4. Instalments

4.1 When are my payments due?

4.2 What if 9 instalments is not suitable for my business?

4.3 How do I let you know which instalment plan I wish to use?

4.4 How do I change my payment plan?

4.5 How much will my instalments be?

4.6 What should I do if I disagree with the amount of my instalments?

4.7 What if my business circumstances change?

4.8 Can I make voluntary payments?

5. Paying your instalments

5.1 How do I tell you what method I want to use?

5.2 What payment methods are available?

5.3 Which payment method should I choose?

5.4 What if I forget to make a payment?

5.5 What if there are changes during the year?

6. Completing and paying your VAT return

6.1 How do I fill in my annual VAT return?

6.2 How do I calculate the VAT to be paid at the end of each year?

6.3 Must I submit my VAT return online?

6.4 What methods are available for making a balancing payment?

7. Special circumstances

7.1 Can repayment traders use the scheme?

7.2 Can I use a retail scheme with annual accounting?

7.3 What if I am partly exempt and use the annual accounting scheme?

7.4 What if I buy a business as a going concern?

7.5 What if I want to leave the scheme?

7.6 Can you withdraw the scheme?

7.7 What if I deregister?

7.8 What happens if I become bankrupt or insolvent?

8. Form VAT 600AA: Annual accounting application

8.1 How do I apply?

8.2 Do I need to keep a copy of my application?

8.3 When can I apply?

8.4 When can I start to use the scheme?

8.5 How do I fill in the application form?

8.6 Where do I send my completed application form?

9. VAT 600 AA&FRS: Application to join both the annual accounting and the flat rate schemes

9.1 What if I want to use the annual accounting and the flat rate schemes together?

9.2 How does using both schemes work?

9.3 What happens after I have applied to use the schemes?

9.4 Can my flat rate percentage change during the year?

9.5 What if I am using both schemes and my business varies over the year?

9.6 How do I calculate my return when my flat rate changes?

9.7 How do I fill in the joint application form?

9.8 When will my joint use of the schemes start?

9.9 If the flat rate scheme and annual accounting have different start dates how do I complete my annual return?

9.10 If I am already using the annual accounting scheme can I join the flat rate scheme?

9.11 What if I no longer qualify for one scheme, but still qualify for the other?

Do you have any comments or suggestions?

If you have a question about VAT, Excise or Customs duty

 

Foreword

This notice cancels and replaces the previous version of Notice 732 (November 2013). Details of any changes to the previous version can be found in paragraph 1.2 of this notice.

1. Basics of the annual accounting scheme

1.1 What is this notice about?

It explains the annual accounting scheme, who can use it and how to apply to join.

1.2 What has changed from the previous version?

Section 5.2 has been updated to show a new telephone number for enquiries regarding VAT bank giro books.

Changes to the VAT helpline numbers.

You can access details of any changes to this notice since it was published either on our website at www.hmrc.gov.uk or by phoning the VAT Helpline on 0300 200 3700.

1.3 What is the annual accounting scheme?

The annual accounting scheme allows you to complete just 1 VAT return each year, instead of the usual 4. You pay instalments of the VAT that you expect to owe, so that you are not faced with a large VAT bill at the end of the year.

You can choose to make 3 (quarterly) or 9 (monthly) instalments towards your end of year VAT liability. These must be paid by Direct Debit, Standing Order or other electronic means.

When you join the scheme we calculate and notify you of the instalment amounts and dates they are due. If you think we have got it wrong or your business changes, you can ask for the instalments to be amended.

As well as paying by instalments, the scheme allows you to make additional voluntary payments towards your end of year VAT bill.

At the end of the year you submit your VAT return and any balance outstanding. If you have paid more money than the amount due on your return, we will return the overpayment.

1.4 How will the scheme help me?

The main benefits of the scheme are:

  • it helps you smooth out your cash flow by paying a set amount each month, or quarter
  • you can make additional payments as and when you can afford to
  • you only need to fill in 1 VAT return each year, instead of 4
  • you get 2 months to submit your annual VAT return and balancing payment, instead of 1
  • you can align your VAT year with the end of your business tax year, to simplify your end of year routines

1.5 What do I need to look out for if I use the scheme?

Some businesses find that the discipline of quarterly VAT returns helps them to keep on top of their VAT and other business records.

If you use annual accounting, you will still need to keep on top of your records to avoid problems at year end.

Instalments under the scheme must be paid electronically. These don’t qualify for any extension to due date as with normal returns.

However, you do get 2 months to submit your return and balancing payment, instead of 1. Section 5 explains the electronic payment options available.

1.6 How do I join the scheme?

There are application forms in sections 8 and 9 of this notice. The form in section 9 is for joining both the annual accounting and flat rate schemes at the same time.

2. Conditions and eligibility of using the scheme

2.1 Am I eligible to use the scheme?

From 1 April 2006, most businesses that expect to have taxable supplies of up to £1,350,000 may join the scheme.

To work out the value of your taxable supplies, see paragraph 2.2.

2.2 How do I work out the value of my taxable supplies for joining the scheme?

The £1,350,000 test excludes VAT. Taxable supplies are the value, excluding VAT, of any standard, reduced and zero-rate supplies that you are likely to make in the coming year. Do not include any exempt supplies or the value of any sales of your capital assets.

2.3 How do I know what my future taxable supplies will be?

If you have been registered for less than 12 months, the simplest way is to estimate in the same way you did when you completed form VAT 1 Value Added Tax: Application for Registration. If you have been registered for 12 months or more, you can use the value of your past year’s taxable supplies as a guide.

If you believe these methods are not a good indicator of your future taxable supplies, you can make the estimate in any reasonable way. You might use either:

  • your business plans
  • information relating to pre-registration business activity
  • business information from a previous owner

2.4 What if the value of my taxable supplies goes over £1,350,000 per year?

Once you are in the scheme, you can remain in it until the value of your taxable supplies goes over £1,600,000 per year. Unless you exceed this limit significantly, you will usually be withdrawn from the scheme at the end of the annual accounting year in which the value of your taxable supplies goes over £1,600,000.

2.5 What if I estimate that the value of my taxable supplies will not go over the limit in the coming year and I am wrong?

We will not penalise you for being wrong provided you can show that there were reasonable grounds for your estimate.

If your estimate of turnover had no reasonable basis and you are above the threshold for the scheme, we will immediately remove you from the scheme. So it is sensible to keep a record of how the estimate was made.

If you realise during the year that your turnover has or will go over the £1,600,000 threshold you must notify us immediately and we will remove you from the scheme (see paragraph 4.7).

Example

You do not expect your first year’s turnover to go over £1,350,000. At the end of the year your turnover is £1,420,000 and you expect it to stay at that level. Although your original estimate was wrong and you should not have started to use annual accounting, you may remain in the scheme until your turnover goes over £1,600,000.

2.6 Who cannot join the scheme?

You cannot join the scheme if you:

  • are registered for VAT as part of a group or division of a company
  • have stopped using annual accounting in the previous 12 months
  • have a VAT debt that is getting bigger. If you have a small debt and have agreed proposals with us to clear it, you may be allowed to use the scheme
  • are insolvent

2.7 Are there any conditions to using the scheme?

When using the scheme you must:

  • make interim payments by the date we notify
  • make interim payments by Direct Debit, Standing Order or other electronic means
  • submit the annual VAT return and any balancing payment by the due date shown on the return

Failure to follow these conditions may result in removal from the scheme. Failure to make the balancing payment and return on time will also result in the issue of a default surcharge.

2.8 Can I use the annual accounting scheme with any of the other VAT schemes?

Yes. If you use the annual accounting scheme with the flat rate scheme, it can make a significant difference to the cost of complying with VAT rules. Section 9 contains more details about using the 2 schemes together.

Other schemes that you may use with annual accounting are:

  • Cash Accounting - Notice 731
  • Retail Schemes - Notice 727
  • Margin Schemes - Notice 718
  • Capital Goods Scheme - Notice 706/2
  • Tour Operators margin scheme - Notice 709/5

For further information, please see the notices available on our website or phone the VAT Helpline for copies on 0300 200 3700.

3. How the scheme works

3.1 What is the basic idea of the scheme?

The scheme works by allowing you to make a number of interim payments during the year (usually 9). You then get 2 months from the end of your VAT year to submit the annual return and make any balancing payment.

3.2 When will my annual accounting year start?

If you join the scheme, we will take the first day of your current VAT period as the start date for the new arrangements. This means that your first VAT period on the scheme will normally run from the first day of the VAT period in which you apply. However, if you apply late in a VAT period it may start from the first day of your next VAT period. For more information, see paragraph 8.3.

Example

If your quarterly VAT period starts on 1 May and ends on 31 July and we approve you to use the scheme on 1 June, then your first annual VAT period will start on 1 May. But if you apply on 27 July, your first annual VAT period will start on 1 August. This is because the VAT return for the quarter end 31 July 2005 will already have been issued.

3.3 When will my annual accounting year end?

Your annual accounting year will end on the last day of the month, normally 12 months after you began using the scheme. You can, however, request an annual accounting year that suits your business needs. So, you can align your VAT accounting year end with your financial year end, or to take into account busy and slack periods in your business year.

Example

If your first annual VAT period starts on 1 May, then normally your annual accounting year will end on 30 April.

3.4 Will my annual accounting period always be 12 months long?

Not necessarily. If you ask for a specific year end, your first period may be shorter than a year so that it coincides with your chosen date. No VAT period may be more than 12 months long.

Note: If your period is for less than 4 months we will not ask you to make interim payments.

Example

Your current quarterly return starts on 1 July and ends on 30 September. You apply to join the annual accounting scheme on 11 August and want a year end of 31 December.

The first day of your annual accounting year will be 1 July and it will end 6 months later on 31 December. We cannot make it end on 31 December of the following year, as that would result in the return being 18 months long.

3.5 Can I change my annual accounting year end once I am in the scheme?

Yes. However, this may result in you being issued with one or 2 short period returns during the transition because no VAT accounting period can be longer than 12 months.

3.6 What is the due date for my return?

The due date for annual VAT returns is normally 2 months after the end of the annual accounting year. However, if you have a part year of less than 4 months, you will only get a month to submit your return and balancing payment.

In all cases, both the dates for the start and end of the VAT period, and the due date will be shown on the return.

3.7 Do I have to apply to join the scheme each year?

No. Provided you are still eligible, you will automatically continue on the scheme. After you have submitted your VAT return we will notify you of the amounts of the interim payments for the next accounting year and the due date of your next annual VAT return and balancing payment.

4. Instalments

4.1 When are my payments due?

The normal rule is that you will pay nine instalments of 10% of your last year's annual VAT liability as shown in paragraph 4.5.

The following diagram shows when the payments are due:

Payments are due


Months of period


1


2


3


4


5


6


7


Monthly payments


     

1st


2nd


3rd


4th


Quarterly payments


     

1st


   

2nd


Payments are due


Months of period


8


9


10


11


12


13
(1)


14
(2)


Monthly payments


5th


6th


7th


8th


9th


 

Final
payment


Quarterly payments


   

3rd


     

Final
payment


4.2 What if 9 instalments is not suitable for my business?

You can apply to make 3 quarterly interim payments if it would better suit your business needs. These will be calculated as shown in paragraph 4.5 below and will be due in months 4, 7 and 10 of the annual accounting period with a balancing payment with your return.

4.3 How do I let you know which instalment plan I wish to use?

Unless you request the quarterly payment pattern, you will be placed on the monthly pattern. If you want to make quarterly payments you should indicate this when you complete your application form.

4.4 How do I change my payment plan?

We will normally expect you to stay on the same payment pattern (quarterly or monthly) for at least 1 year. Please write to the Annual Accounting Registration Unit (address in paragraph 8.6) if you wish to change payment patterns.

4.5 How much will my instalments be?

Monthly

If you have been registered for 12 months or more, each monthly instalment will be 10% of your previous year’s VAT liability.

If you have been registered for less than 12 months each instalment will be 10% of an estimation of your expected VAT liability.

Quarterly

If you have been registered for 12 months or more, each quarterly instalment will be 25% of your previous year’s VAT liability.

If you have been registered for less than 12 months each instalment will be 25% of an estimation of your expected VAT liability.

In either case we will let you know when your payments are due and how much your instalments will be.

Example

Your VAT liability for the previous year was £10,000. If you are on monthly payments you will pay 9 instalments of £1,000. If you make quarterly payments you will pay 3 instalments of £2,500.The balance of your actual VAT liability for this year will be due with your VAT return.

4.6 What should I do if I disagree with the amount of my instalments?

Always check that the schedule of payments is a true reflection of your business. If the interim payments are set too low you will have to make a larger balancing payment. If they are too high then you will be paying over money earlier than you have to.

If you disagree with the amount of your interim payments, or you expect your VAT liability to increase or decrease significantly (see paragraph 4.7) over the course of the year you should contact the Annual Accounting Registration Unit (address in paragraph 8.6) and explain how you have calculated your interim instalments. If we agree with your calculations we will write and inform you of the revised instalments.

4.7 What if my business circumstances change?

If there are significant changes, or you expect significant changes, to your business during the year that will affect the amount of VAT you pay, you must contact the Annual Accounting Registration Unit immediately (address in paragraph 8.6). Significant changes include:

  • you realise the value of your taxable supplies will rise above £1,600,000 for the current year, or it has already gone over £1,600,000 - this may be due to new contracts, buying another business etc
  • you realise that your VAT payable will, or has increased by 10% since the last time your instalments were calculated

We will amend your interim payments to reflect your new liability, or the changes to your business may result in you being removed from the scheme.

Example

At the end of the annual period ending 31 March your VAT liability was £30,000 and you are informed that your monthly instalments are £3,000. During your new annual accounting year you realise your VAT liability will be nearer £40,000. You write in to us and we will amend your instalments to £4,000.

4.8 Can I make voluntary payments?

Yes. You can make voluntary payments at any time in multiples of £5 by Bank Giro Credit, or CHAPS/BACS.

Paragraphs 5.2 and 5.3 give further information on these methods.

5. Paying your instalments

5.1 How do I tell you what method I want to use?

On your application form tick the box for the payment method of your choice. Once on the scheme, if you wish to change to another method please write to the Annual Accounting Registration Unit (address in paragraph 8.6. We expect you to use your chosen method of payment for at least 1 year).

5.2 What payment methods are available?

Payment method


Action required


Direct Debit


Complete the Direct Debit instruction form (VAT 623) and send it with your application form to the Annual Accounting Registration Unit (address in paragraph 8.6).


We will send you a schedule advising when and how much we will be debiting from your account.


The instruction should be signed by the owner, a partner, an authorised agent or a director of the business that is applying to join the scheme.


Standing Order


When your application is accepted we will send you a standing order mandate. Complete the mandate and send it to your bank. This will tell your bank about when and how much to pay us.


Bank Giro


Use the Bank Giro slips we send to you when you send your payment to your bank. You will need to remember to make your payments in time to reach us by the due date. If you need additional slips, please phone us on 03000 519206


CHAPS/BACS


Make arrangements with your bank to ensure your payment instructions are received by the required dates. Our bank details are:


Account name: HMRC VAT
Sort Code: 08-32-00
Account Number: 11963155


5.3 Which payment method should I choose?

The choice is a matter for you. Seek advice from your bank to ensure the payment arrangements enable you to make the payments on time. They will also be able to give you details of the cost of each method.

Direct Debit offers the convenience of setting up the instruction once.

5.4 What if I forget to make a payment?

If you miss a payment we will send you a reminder and a request for immediate payment. The late payment will have to be paid by CHAPS or BACS.

Remember, you have a responsibility to ensure that the payments are received into our bank account by the due date. Failure to do so may result in your being removed from the scheme.

5.5 What if there are changes during the year?

You must inform the Annual Accounting Registration Unit (address in paragraph 8.6) of any changes of bank or bank details, so that payment arrangements can be revised.

If your interim payment amount changes during the year and you are not paying by Direct Debit, you must contact your bank in good time to ensure the new amount is paid at the right time.

6. Completing and paying your VAT return

6.1 How do I fill in my annual VAT return?

Fill in your annual VAT return in the usual way for the period shown at the top of the return. Do not deduct any interim payments you have made during the year when calculating the figure to put in box 5.

If you need more information about how to fill in your VAT return see Notice 700/12 Filling in your VAT return.

6.2 How do I calculate the VAT to be paid at the end of each year?

The amount entered in box 5 of the VAT return is the amount due for the year. This figure will be calculated automatically if you are completing your return online. However, the balancing payment you send to us should be the box 5 figure minus the interim payments you have made for the annual period.

Example

During the year you have paid 9 instalments of £3,000 each. At the end of the year you calculate that your VAT liability for the year was £32,000. You complete your VAT return with box 5 showing tax due of £32,000. You submit your return and payment of the remaining £5,000 to us by due date.

If the monthly instalments you have made during the year are more than the amount in box 5 on the return, we will refund the difference when we receive your annual VAT return.

Always submit your VAT return by the due date even if you do not need to make a balancing payment.

6.3 Must I submit my VAT return online?

Paper VAT returns are being phased out, and we will notify you in writing if you have to submit your return online. Even if you are not required to submit your return online, you may do so if you wish.

To submit your return online you must register and enrol through our website www.hmrc.gov.uk and then choose to use the VAT Online Returns Service or commercially available software.

If you submit your VAT return online you must also pay any VAT due by electronic means.

6.4 What methods are available for making a balancing payment?

You can pay any balance due at the end of the year by Direct Debit, BACS, CHAPS, Bank Giro or by debit/credit card. The ‘How to pay VAT’ page on our website gives information on these methods.

If you use paper VAT returns you can also pay by cheque. The instructions on how to pay are on the reverse of the return.

Please note that the additional time for submitting or paying VAT returns electronically is not available if you use the annual accounting scheme. This is because you already get an extra month to do this.

7. Special circumstances

7.1 Can repayment traders use the scheme?

You are a ‘repayment trader’ if you consistently claim more VAT from us than you pay. You can still join the scheme and you will not need to make interim payments if you are in an annual repayment position. However, you will not receive any repayment due until you have submitted your VAT return at the end of your annual accounting year.

If you occasionally have repayment returns as well as payment returns, the scheme may not be suitable for you. Repayments can only be made based upon the VAT declared as claimed on a VAT return. If you are in a VAT claim position during the year you will be unable to submit a return and will have to wait till the end of the year. At that time you submit a normal return and this may result in you paying us VAT or submitting a claim.

7.2 Can I use a retail scheme with annual accounting?

Yes. In most cases you follow the scheme rules that apply to each quarter, but perform the calculations once a year. The only exception to this is if you are using the Direct Calculation scheme 2.

In that case, your calculation follows the rules for the annual adjustment in VAT Notice 727/5 Retail schemes: How to work the Direct Calculations schemes.

7.3 What if I am partly exempt and use the annual accounting scheme?

If you are partly exempt, the date when you make your partial exemption calculation must coincide with the end of your annual accounting period. This means that you do not have to do your partial exemption calculations on a quarterly basis - you just make the calculation using the figures for the whole of the annual accounting period.

If your first accounting period is for a part year, its end date will still coincide with the end of your partial exemption year and you must complete your partial exemption calculations.

7.4 What if I buy a business as a going concern?

If the business you buy will significantly change the total amount of VAT you will pay in the future you must contact us immediately (see paragraph 4.7).

7.5 What if I want to leave the scheme?

Just write to the Annual Accounting Registration Unit (address in paragraph 9.6) and tell them you wish to return to your normal method of paying and accounting for VAT. You will still be entitled to 2 months to submit your final VAT return on the scheme and any balancing payment.

However, if you leave the scheme less than 4 months into a shorter period (as described in paragraph 3.4), you will only get 1 month to submit your final VAT return and any balancing payment.

Note: If you choose to leave the scheme, or are removed for failing to comply with the conditions you will not be able to rejoin for a period of 12 months.

7.6 Can you withdraw the scheme?

Yes. We can withdraw your authorisation to use the scheme at any time for protection of the revenue.

We can also withdraw your authorisation to use the scheme if you have calculated your expected annual taxable supplies incorrectly, or are otherwise not eligible to use the scheme.

7.7 What if I deregister?

If you deregister from VAT you have to complete a final VAT return. You will normally get 2 months to make this return and pay your balance of VAT due.

However, if you leave the scheme shortly after joining as per paragraph 7.5 you will only get 1 month to submit your return and balancing payment.

7.8 What happens if I become bankrupt or insolvent?

If you become bankrupt or insolvent you must stop using the scheme immediately.

8. Form VAT 600AA: Annual accounting application

8.1 How do I apply?

You apply by completing the application form VAT 600AA Note that this form is for those businesses that only want to use the annual accounting scheme. If you want to use the annual accounting scheme in conjunction with the flat rate scheme, you must use the joint application form VAT 600AA&FRS. We do not have blank copies of the application form. You can print a copy of the form from our website.

8.2 Do I need to keep a copy of my application?

This is a good idea and will help if you have any questions about your application.

8.3 When can I apply?

You must remember to give us enough time to process your application. This is because your authorisation to use the annual accounting scheme normally takes effect from the first day of the period in which your application is finalised.

If you apply near the end of your accounting period, and the return for that period has already been issued, your entry to the scheme will be delayed until the start of the next period.

Example

Your quarterly VAT period starts on 1 May and ends on 31 July. If you apply to join the scheme on 27 July your first annual VAT period will start on 1 August. This is because we will have already issued your quarterly return for the period ending 31 July.

Do not forget to submit all the quarterly returns you receive.

8.4 When can I start to use the scheme?

We will notify you in writing if your application is accepted or not. If accepted the letter will tell you the:

  • amount and timing of the interim payments we have calculated for you
  • method of electronic payment that you have chosen
  • due date for your annual return and balancing payment

8.5 How do I fill in the application form?

The following notes may help you complete your application form.

Section A


Name


Enter the normal name by which your business is known. If you are already registered for VAT this should be the name on your certificate of registration (form VAT 4).


Address


Enter the address of your principal place of business.


VAT Registration Number


This must be quoted on all correspondence with us. It can be found on your VAT 4 or VAT return. If you are applying at the time you register please ensure that your application is firmly attached to your VAT 1.


Phone number


Please supply a daytime phone number where we can contact you if there is a query about your application.


Section B


Annual accounting year-end


This is the month in which you want your annual return to finish. If, for example you put June, your annual period will end on 30 June.
Your first period does not have to be a full 12 months, see paragraph 3.4.


Section C


Frequency of payment


Tick the relevant box on the form to let us know if you want to pay quarterly or monthly interim payments.


Method of interim payments


Enter your preferred method of payment by ticking the relevant box on the form. (See paragraph 5.2 for details of the electronic payment methods.)


Section D


Declaration


This should be signed by the owner, a partner, an authorised agent, or a director of the business that is applying to join the scheme.


8.6 Where do I send my completed application form?

Send your completed application form to:

HM Revenue & Customs
Annual Accounting Registration Unit
National Registration Service
Imperial House
77 Victoria Street
Grimsby
North East Lincolnshire
DN31 1DB

This is also the address to send any other correspondence about your use of the annual accounting scheme, such as changes to bank details or year end. For general enquiries, including those about the annual accounting scheme, phone the VAT Helpline on 0300 200 3700.

Note: If you have chosen to make payments by Direct Debit then you must also complete a bank instruction form (VAT 623) and send it to the above address with your application form. Failure to return a completed VAT 623 will result in your application being rejected and returned to you.

9. VAT 600 AA&FRS: Application to join both the annual accounting and the flat rate schemes

VAT 600AA&FRS Application to join the Annual Accounting Scheme and the Flat Rate Scheme

9.1 What if I want to use the annual accounting and the flat rate schemes together?

Complete the joint application form opposite. Note that this form is for those businesses that want to apply to use both annual accounting and flat rate schemes. If you only want to apply to use the annual accounting scheme, you must complete the form in section 8. Send the completed form to the Annual Accounting Registration Unit at the address in paragraph 8.6. Registration for each scheme will be looked at separately.

If you wish to pay by Direct Debit, you must complete the Direct Debit instruction form (VAT 623) and enclose it with your application. If you do not include a completed VAT 623, your application will be rejected and returned to you.

9.2 How does using both schemes work?

You follow the rules in Notice 733 Flat rate scheme for small businesses for calculating your VAT return figures and for filling in the return. Instead of doing that 4 times a year, you do it just once when your annual accounting return is due.

9.3 What happens after I have applied to use the schemes?

If you have applied for both schemes, you will get 2 letters. Each letter will refer to 1 scheme only and tell you whether we have accepted your application and any start date for you to use the scheme.

If your application is accepted for only 1 of the schemes, you must follow the rules of that scheme only.

If you are accepted onto annual accounting, the letter will give the information stated in paragraph 8.4.

9.4 Can my flat rate percentage change during the year?

Yes. If during the year your business activities change, then you must check to see if you fit into a new sector. If you do, you must pay a different flat rate percentage. You must also pay a different flat rate percentage if we change the flat rate percentage for the sector into which your business fits.

9.5 What if I am using both schemes and my business varies over the year?

If you are using the flat rate scheme and your business covers more than 1 trade sector, you use the flat rate percentage for what you expect to be the largest part of your business by turnover in the coming year.

If the balance of your business changes during your flat rate year, then you continue to use the percentage that was appropriate at the beginning of that year. If your business includes activities in more than 1 flat rate sector, you must review the balance between the sectors at each anniversary of joining the flat rate scheme.

If, on the anniversary, the balance has changed, or you expect it to in the coming year, use the flat rate percentage for what you expect to be the largest portion of your business in the coming year.

9.6 How do I calculate my return when my flat rate changes?

When you calculate your return, you must do 2 calculations. The first of these will cover the period until the rate changed, the second will cover the period after the change and be at a different rate. If more than 1 change of rate occurs during the year then further calculations will need to be made in the same way.

Example

During your annual accounting year, your rate changes from 10% to 9%. You must calculate your VAT from the start of the period to the day before the change using a rate of 10% and calculate your VAT from the date of change to the end of the period using the rate of 9%. Add the 2 VAT figures together and put them on your VAT return.

Notice 733 Flat rate scheme for small businesses may help further.

9.7 How do I fill in the joint application form?

The following notes will help you fill in the joint application form:

Section D


Main business activity


Decide which of the sectors listed in section 6 of Notice 733 Flat rate scheme for small businesses most accurately describes your business. If your business covers more than 1 sector, choose the sector that is the main part of your business by VAT inclusive turnover.


Flat rate percentage


This is the percentage for your sector as shown in the table in section 6 of Notice 733 Flat rate scheme for small businesses.


Start date


Your options are:


  • leave this blank. If you do this your authorisation will start at the beginning of the next annual accounting period
  • write ‘date of registration’, or ‘EDR’. If you do this your authorisation will begin from the date you registered for VAT provided you apply at, or close to, the time you register
  • write ‘AA start date’. This will give you the same start date as the annual accounting start date, or
  • write the date you want the scheme to start. This cannot normally be retrospective

Section E


Declaration


This should be signed by the owner, a partner, an authorised agent or a director of the business that is applying to join the scheme.


9.8 When will my joint use of the schemes start?

Joint use of the schemes will normally start from the beginning of the period in which you apply to use annual accounting.

If this is not what you want, the form allows you to request a different start date for your use of the flat rate scheme.

9.9 If the flat rate scheme and annual accounting have different start dates how do I complete my annual return?

If you want to use different start dates for the 2 schemes you will need to do 2 calculations when you complete your annual accounting return:

  • 1 calculation for the period you were not on the flat rate scheme, using normal VAT accounting rules
  • 1 calculation for the period you were on the flat rate scheme using the rules for calculating liability under the flat rate scheme

Your total VAT liability for the return period will be the sum of those 2 calculations.

9.10 If I am already using the annual accounting scheme can I join the flat rate scheme?

Yes. However, if you apply to begin using the flat rate scheme in the middle of an annual accounting period, you will have to do 2 calculations when you complete your return as explained in paragraph 9.9.

To avoid 2 calculations, it is best to apply to use the flat rate scheme at the start of an annual accounting period. If you do not want to wait to the end of your annual accounting year, you can change your existing annual accounting year end to an earlier date and start both schemes together. This will result in some amendments to your annual accounting periods and payments to accommodate these changes.

9.11 What if I no longer qualify for one scheme, but still qualify for the other?

You will normally continue in the scheme you still qualify for, unless you request removal. The 2 schemes have different conditions and you must continue to check that you qualify for both.

If you leave the flat rate scheme in the middle of an accounting period, you will have to do 2 calculations when you complete your next annual VAT return. This is explained in paragraph 9.9. In this case the first calculation will cover the period you used the flat rate scheme and the second the normal VAT accounting rules.

Do you have any comments or suggestions?

We would be pleased to receive any comments or suggestions you may have about this notice. Please write to:

HM Revenue & Customs VAT Process Owner Team
VAT Registration and Accounting Policy Team
Floor 1 Regian House
Liverpool
L75 1AD

Please note this address is not for general enquiries.

If you have a question about VAT, Excise or Customs duty

Go to www.hmrc.gov.uk

Phone 0300 200 3700 Monday to Friday 8.00am to 6.00pm.

Os hoffech siarad â rhywun yn Gymraeg, ffoniwch 0845 010 0300,
Llun i Gwener 8.00am i 6.00pm.

If you are hard of hearing or speech impaired and use a Textphone, phone 0300 200 3719 Putting things right

If you are not satisfied with our service, please let the person dealing with your affairs know what is wrong. We will work as quickly as possible to put things right and settle your complaint. If you are still unhappy, ask for your complaint to be referred to the Complaints Manager.

For more information about our complaints procedures go to www.hmrc.gov.uk and under ‘quick links’ select ‘Complaints & Appeals’.

Download options

This document is available in the following formats

Please be aware that our PDF, Word, Excel and Powerpoint documents will open in a new window.

Download free viewers for all formats >>

$START-DATA$ title=Annual accounting^ summary=VAT Notice 732: The annual accounting scheme allows you to complete just one VAT return each year, instead of the usual four. You pay instalments of the VAT that you expect to owe, so that you are not faced with a large VAT bill at the end of the year.^ doctype=PublicNotice^ date=22-Apr-2014^ author=KD6030855^ $END-DATA$
content tools
FAQ's

See the VAT FAQs if you have any queries.