Annual Accounting and the Flat Rate VAT Scheme

Better off on the Annual Accounting Scheme for Flat Rate Scheme

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I have some clients who may be considered limited cost traders for the odd quarter. However, they easily exceed the 2% and £1000 tresholds annually. Therefore, by putting them on the Annual Accounting Scheme, they would qualify for the reduced rate of the Flat Rat Scheme for the whole year.

Seems like a no brainer to me, unless im missing something?

There is unlikely to be much by way of an adjustment as we capture clients income monthly, so are likely to be able to accurately estiamte each payment due to HMRC.

 

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VAT
By Jason Croke
13th Nov 2023 17:21

https://www.gov.uk/guidance/vat-annual-accounting-notice-732#sect9 Section 9 explains the details on using flat rate within the annual accounting scheme and section 9.6 is also of interest.

Annual accounting gives some certainty with a fixed monthly payment followed by a balancing adjusted payment/refund at year end. Flat rate scheme can benefit where there is a low flat rate percentage and a bit of extra profit to be made, but in quarters where they will be a limited cost trader then any such benefit is lost.

OP states "There is unlikely to be much by way of an adjustment as we capture clients income monthly, so are likely to be able to accurately estimate each payment due to HMRC."

Why do you need to accurately estimate each payment due to HMRC? The payment is a fixed amount each month, the amount is set at the beginning based on your net VAT liability the previous year or if first time registered, an estimate of what you think the net VAT liability will be.

If the strategy is that the client knows they're a limited cost trader in reality but using annual accounting they set their monthly payment based on their normal flat rate sector, then come year end there will likely owe HMRC money as they'll have "underdeclared" their monthly payments having based them on the normal flat rate rather than the limited cost trader flat rate, but I guess client will have benefitted from the extra cash sitting in their bank all year having low balled their monthly payment to HMRC.

Seems like a lot of extra work and checks/hassle to arrive at the same fiscal outcome come year end (ie, the VAT liability due to HMRC is the same whether using annual accounting or normal quarters).

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