Could HMRC incorrectly withdraw you from annual accounting?

Benefits of scheme

The main advantage of the annual accounting scheme (AAS) is that your business will submit one annual return instead of four quarterly returns, as set out in VAT Notice 732. You must still make regular payments on account during the annual period, based on your previous year’s tax liability, and will get two months after the end of the period to submit the return and pay the balance of tax you owe to HMRC.

It is logical to use the annual period that coincides with your financial year.

If your business turnover and profits increase compared to the previous year, the payments on account could be too low, leaving you with a large balancing payment. You can ask HMRC to increase the payments.

What are the turnover limits?

You can join the AAS if you expect your taxable sales in the next twelve months will be £1.35m or less excluding VAT. Once you have joined, you will not need to leave until your annual taxable sales have exceeded £1.6m excluding VAT. HMRC also has the power to withdraw you at any time for “protection of the revenue”, e.g. if your business has a history of non-compliance.

The thresholds are the same as for the cash accounting scheme (CAS), which means that your business can account for output tax on a return based on payment rather than invoice dates. You can belong to the AAS and CAS at the same time.

If you use the CAS, you cannot claim input tax until you pay your suppliers.

HMRC error

The AAS thresholds are only based on your taxable turnover, i.e. sales where you charge 0%, 5% or 20% VAT. If your business has exempt sales, these are excluded from the joining and leaving calculations, i.e. only taxable sales are relevant.

In many cases, HMRC has withdrawn businesses from the AAS at short notice because the Box 6 outputs figure on the annual return has exceeded £1.6m. However, it does not know if this figure includes exempt income, which should always be excluded.

Example. Acom Ltd is partially exempt because it has both taxable and exempt sales. The company has recently submitted its AAS return to HMRC, which shows £1.8m in Box 6. However, £500,000 of this figure relates to fees it has received as an intermediary for arranging mortgages, which are exempt from VAT. The company can remain in the AAS because its taxable turnover of £1.3m is less than the exit threshold of £1.6m.

What should you do?

If your circumstances are similar to Acom’s, and you have received correspondence from HMRC instructing you to leave the AAS, you should contact it to resolve the issue, i.e. asking to remain in the scheme. Act promptly to avoid the risk that your business will be placed on quarterly returns and start receiving central assessments demanding payments.

The address to write to is: Annual Accounting Registration Unit, BT VAT, HMRC, BX9 1WR.