The VAT annual accounting scheme may seem a good option for a time-pressed taxpayer, as he doesn’t have to submit quarterly VAT returns. Instead the taxpayer pays monthly or quarterly instalments of VAT due during the year, and makes a final balancing payment with a single VAT return for the whole accounting year.
If taxpayer chooses to pay monthly instalments, these will be set at 1/10th of his previous year’s VAT liability. Nine monthly payments are made, (starting in the 4th month), with a rounding amount for the year paid with the single VAT return.
However, the discipline of reviewing the accounts every quarter is lost. Where the business is booming (and hence the taxpayer has no time to devote to VAT), the final payment may be in excess of the total VAT paid on account, and may come as a big shock.
Under annual accounting the taxpayer has two months to submit the annual return. But if the return is late HMRC will issue an estimated assessment, which if that is under estimated, penalties will be due.
This was the situation that Curtises Ltd found itself in. The company used the annual accounting scheme and paid VAT of £32,499 in total during the year. It was late in submitting the single VAT return, so HMRC issued an assessment for £35,578. The company directors knew this wasn’t enough to cover the additional VAT due, but they weren’t sure how much more VAT they had to pay, so they paid £46,131.
When the VAT return was eventually submitted it showed the total VAT liability for the year was £215,233. HMRC had no choice but to issue a 15% penalty for a prompted disclosure. This was calculated as 15% of the late paid VAT.
Written by the Tax Advice Network