VAT Annual Accounting Scheme: Is It Right for You?

The VAT Annual Accounting Scheme lets you send one VAT return a year in place of four, while paying your VAT bill in fixed instalments along the way. It suits steady businesses that normally owe VAT and want predictable payments, and it is a poor fit for anyone who regularly gets VAT refunds or whose sales swing a lot from year to year. You can join if your estimated VAT taxable turnover is £1.35 million or less. Here is how it works and how to decide.

Key takeaways

• One VAT return a year, due two months after your accounting year ends.
• Advance payments are either nine monthly instalments of 10% or three quarterly instalments of 25% of your estimated bill.
• A balancing payment, or a refund, is settled when you submit the return.
• Join with estimated VAT taxable turnover of £1.35 million or less. Leave if it goes over £1.6 million.
• It does not suit businesses that regularly reclaim VAT.

What is the VAT Annual Accounting Scheme?

Most VAT-registered businesses submit a return and pay HMRC every quarter. Under the Annual Accounting Scheme you make advance payments towards your VAT bill during the year, based on your last return or on an estimate if you are new to VAT, and submit a single return at the end. That return shows the real figure. If your instalments fell short you pay the difference, and if you overpaid you apply for a refund. HMRC's overview is on GOV.UK under VAT Annual Accounting Scheme.

The scheme changes the timing of returns and payments only. It does not change how much VAT you owe, what you can reclaim, or the need to keep proper digital records under Making Tax Digital for VAT.

Who can join, and who cannot

You can join if you are VAT registered and your estimated VAT taxable turnover for the next 12 months is £1.35 million or less. VAT taxable turnover is the total of everything you sell that is not VAT exempt. The eligibility rules say you cannot use the scheme if:

• you left the scheme in the last 12 months;
• your business is part of a VAT registered division or group of companies;
• you are not up to date with your VAT returns or payments;
• you are insolvent.

Once in, you must leave if your VAT taxable turnover is, or is likely to be, more than £1.6 million at the end of the annual accounting year.

How the payments work

Assuming a normal 12 month accounting year, you choose one of two instalment patterns:

• Monthly: nine payments, each 10% of your estimated VAT bill, due at the end of months 4, 5, 6, 7, 8, 9, 10, 11 and 12.
• Quarterly: three payments, each 25% of your estimated bill, due at the end of months 4, 7 and 10.

Monthly instalments cover 90% of the estimate and quarterly instalments cover 75%, so there is always something left to settle. The return, and the final balancing payment, are due two months after the end of the accounting year. HMRC writes to tell you when the instalments are due and how much they will be, and payments must be made electronically. The dates are set out under return and payment deadlines.

Standard VAT accounting vs annual accounting

For the standard timetable, see VAT return deadlines and payment explained.

Who does it suit?

The scheme tends to work well if:

• your sales and costs are steady from year to year;
• you normally owe VAT to HMRC and rarely get a refund;
• you like fixed payments you can budget for;
• your books are kept up to date anyway, so one return a year is not an excuse to fall behind.

It is usually the wrong choice if:

• you regularly reclaim VAT, for example because you sell mostly zero-rated goods. You would get only one repayment a year;
• your turnover is falling. Instalments based on last year could be more than you really owe, and the overpayment only comes back after the annual return;
• your turnover is growing fast. Instalments based on last year will be too low and the balancing payment can be a shock;

Combining it with other VAT schemes

Annual accounting can be used together with the Cash Accounting Scheme, where you account for VAT when money is actually received and paid, or with the Flat Rate Scheme, where you pay a fixed percentage of turnover. Our comparison of flat rate and standard VAT accounting explains who benefits from that. Each scheme has its own conditions and its own application, so check you qualify for both.

Step by step: deciding and joining

1. Check eligibility. Estimate your VAT taxable turnover for the next 12 months and confirm none of the exclusions apply.
2. Look at your last four returns. If any were repayments, think carefully before going further.
3. Forecast the year ahead. Compare instalments based on last year with what you expect to owe.
4. Choose monthly or quarterly instalments. Monthly leaves a smaller balancing payment.
5. Apply. If you are already VAT registered, apply online or by post. If you are registering for VAT, you can join at the same time. See join or leave the scheme on GOV.UK.
6. Keep your books monthly and track the VAT you really owe, so you can put money aside for the balancing payment.
7. Review each year. If turnover is heading towards £1.6 million or your trade has changed, plan your exit.

Worked example (illustrative)

"Tidewell Print Ltd", an illustrative example, is a small printing company with VAT taxable turnover of about £240,000. It joins the scheme with an annual accounting year running from 1 January to 31 December 2027. Based on its previous returns, HMRC estimates its VAT bill for the year at £12,000.

The director chooses monthly instalments. Each is 10% of the estimate, so £1,200, paid at the end of each month from April to December 2027. That is nine payments totalling £10,800. If she had chosen quarterly instalments, she would have paid £3,000 at the end of April, July and October, totalling £9,000.

Trade is a little better than expected and the annual return shows an actual VAT bill of £13,500. The balancing payment is £13,500 less £10,800, which is £2,700. On the quarterly pattern it would have been £4,500. The return and the balancing payment are both due by the end of February 2028, two months after the year end. Because her bookkeeping was kept up to date each month, she could see the shortfall building and had set the money aside.

The company and figures are invented for illustration and are not a real client.

Common mistakes

• Treating instalments as the whole bill. They cover only 90% or 75% of an estimate. Budget for the balance.
• Letting the books slide. One return a year can tempt people into eleven months of no bookkeeping, followed by a painful twelfth.
• Joining when you usually get refunds. You would wait up to a year for money you used to get quarterly.
• Not telling HMRC when trade changes sharply. If the estimate no longer reflects reality, contact HMRC about your instalments.
• Missing the £1.6 million limit. Monitor turnover during the year, not only at the end.

How we can help

We look at your recent returns and forecast, tell you plainly whether annual accounting, cash accounting or the flat rate would help or hurt, and handle the application and the returns. Our VAT returns service starts from £120 per quarter on a fixed fee. See our pricing, or contact us to review which VAT scheme fits your business.