VAT (Value Added Tax) is a major component of the tax landscape and applies to businesses with a VAT-taxable turnover of over £85,000.
Once businesses reach a certain liability threshold, they must pay their quarterly VAT bills in instalments. These advance payments are also known as VAT payments on account.
As a result, it’s vital for large and growing firms to understand when they need to make payments on account and how to handle it.
What are VAT payments on account?
VAT payments on account are advance payments towards your VAT bill, designed to help manage the cashflow both for businesses and HMRC.
These payments are not additional but are part of your overall VAT liability, paid in advance.
This system is mainly aimed at larger VAT payers to help them spread their payments more evenly throughout the year.
Who needs to make VAT payments on account?
Businesses must make VAT payments on account if they send VAT returns quarterly and their VAT liability exceeds £2.3 million in any 12-month period or less.
This threshold includes VAT on imports and moving goods into and out of excise warehouses. When a business exceeds this threshold, the payments on account cycle starts in the first quarter following this.
The value of these payments is based on the business’s annual VAT liability in the period they go over the threshold, divided by 24 to calculate each instalment.
For businesses registered as part of a VAT group, the liability of the entire group will determine how much they need to pay and when. All group members are jointly responsible for the payments in such cases.
It’s important to note that if your total VAT liability fluctuates significantly, HMRC may adjust the amount of your payments on account. Furthermore, if your liability decreases below the £2.3m threshold, HMRC may remove you from the payments on account arrangement.
When do you need to pay?
Businesses must ensure HMRC receives each instalment by the agreed deadline, which is typically the last working day of the second and third months of every VAT quarter. If you fail to meet these deadlines, you may incur late payment interest on your VAT bill.
For businesses that see wide seasonal variations in turnover, there’s an option to pay the actual VAT liability for the previous month rather than the amounts specified by HMRC.
How do VAT payments on account work?
Here’s a simplified overview of the VAT payments on account process:
Determine eligibility
The first step is to assess whether your business is required to make VAT payments on account. If your VAT liability exceeds the £2.3m threshold within 12 months, you will fall into this category. Including VAT on imports and movements of goods in and out of excise warehouses is important to this calculation.
Frequency of payments
VAT payments on account are typically due at the end of the second and third months of each VAT quarter. This means that instead of a single VAT payment at the end of each quarter, you will make three payments – two of these are ‘on account’ payments, and the third is a ‘balancing’ payment.
Amount of payments
Generally speaking, each payment will represent half of your VAT liability from the previous quarter. This is an estimated amount based on your past VAT liability and is meant to help spread the cost of your VAT bill more evenly throughout the year. It’s a way of pre-paying a portion of your VAT liability in advance.
Balancing payment
The balancing payment is made when you submit your VAT Return at the end of the VAT quarter. This payment represents the difference between your total VAT liability for the quarter and the ‘on account’ payments you’ve already made.
If your actual VAT liability for the quarter is more than the sum of the two payments on account, you’ll pay the difference as a balancing payment. Conversely, if your liability is less, you may be due a refund.
Adjustments and compliance
It’s crucial to accurately calculate and pay your VAT payments on account in a timely manner to avoid penalties or interest charges. HMRC may adjust the amount you must pay on account if your VAT liability fluctuates by 20% or more.
Likewise, if your VAT liability falls below the £2.3m threshold, you may no longer be required to make these payments on account.
How Thomas Barrie & Co can assist
At Thomas Barrie & Co, our VAT expertise can help you navigate the complexities of VAT payments on account.
We offer tailored VAT services and advice to ensure your business remains compliant while optimising cashflow and financial planning. This includes:
- VAT liability assessment: Determining if your business needs to make VAT payments on account.
- cashflow planning: Assisting in financial planning to accommodate VAT payments.
- VAT compliance and record-keeping: Ensuring that your business adheres to VAT regulations and maintains proper records.
- Ongoing advisory services: Providing up-to-date information on changes in VAT legislation and thresholds.
VAT payments on account are an important aspect of the VAT system, particularly for businesses with a high VAT liability.
Need support managing and organising your VAT payments on account? Contact us today to find out how we can help.