The annual accounting system can be used for those with an estimated turnover of under £1.35 million. Businesses with a steady and stable year on year turnover, or those with gentle growth may elect to use this option and can continue to do so until they reach the threshold of £1.6 million turnover.

With annual accounting it means a business can either make 9 or 3 standard fixed payments in the year, with any outstanding amount to be paid with the VAT return or any overpayment to be claimed back with the VAT return. There is only one VAT return to be made and the fixed payments are calculated equally based on your previous year’s total VAT liability. If you are a new company then the VAT payments will be based on an estimation of your first year’s turnover.

In addition to less paperwork to be completed (as you reduce the normal four VAT returns to one single VAT return in the year) it can also help manage overall cash flow with more regular smaller payments. However, it is not recommended for businesses who regularly reclaim on VAT as they would only be able to do so once at the end of the year.

The cash accounting option is also available to those with a VAT turnover of less than £1.35 million per year. Your business VAT liability is calculated on payments made and received, rather than on invoices made and received. One advantage of this method is that it offers relief from bad debts as you won’t be liable to pay VAT on payments you do not receive yourself.

We may recommend cash accounting for those businesses who receive payment in arrears, and would similarly advise you to make purchases just before the end of your VAT quarter as it will enable you to claim back VAT quickly.

This VAT return scheme is most suited for smaller SMEs. Those with a turnover of under £150,000 are eligible to use it, but once opted in, they may continue to use this option until they reach the threshold of £230,000.

We would recommend this option to clients who are looking to simplify their business administration. Instead of calculating what VAT can and cannot be claimed, your VAT liability becomes a fixed percentage of your turnover.  The percentage is dependent upon your industry and is determined by HMRC. The rates can be found here. Clients will have to continue charging VAT on their sales invoices.

Before proceeding, it is worth bearing in mind that you will be unable to claim VAT back on purchases made for the business (unless they’re capital items exceeding £2000). So if your business needs to make a lot of purchases, this option may not be beneficial.