A Guide to the VAT Annual Accounting Scheme

Businesses which register for VAT will normally make VAT submissions four times a year, but the rules are a bit different if you register for the VAT Annual Accounting Scheme. As the name suggests, you’ll submit an annual return to account for your VAT, but you’ll need to make advance payments towards your bill throughout the year.

Who can use the VAT Annual Accounting Scheme?

Your business can join the VAT Annual Accounting Scheme if your estimated VAT taxable turnover is £1.35 million or less for the next 12 months. This figure excludes the value of any sales you expect to make from capital assets.

There are some exceptions to those who can use the scheme. Business can’t use the VAT Annual Accounting Scheme if:

They left the scheme in the previous 12 months
You have outstanding VAT returns or payments
The business is part of a larger group of VAT registered companies
Your business is insolvent

It’s also worth noting that HMRC can force you to leave the scheme if you don’t submit your VAT return or pay your bill on time.

Are there pros and cons to the Annual Accounting Scheme?

Just like any other business decision, there are advantages and disadvantages to signing up for VAT Annual Accounting depending on your particular circumstances.

Potential Benefits	Potential Disadvantages
You have an extra month to complete your VAT return and pay the bill.	You must tell HMRC if your VAT liability is likely to be significantly higher or lower than the previous year.
It can make forecasting and planning more straightforward because you’ll pay a set amount each time.	The payment amount is worked out using the previous year’s return, so if this year’s turnover is lower, you’ll still pay last year’s rate. You won’t be able to reclaim the overpayment until the end of the year.
You won’t need to submit your VAT return as regularly, which can ease some of the admin burden.	It may not be beneficial if you claim back VAT regularly, as you’ll only be able to claim a repayment once a year.

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What’s the difference between the Annual Accounting Scheme, the Flat Rate Scheme, and Cash Accounting Scheme?

There are some key differences in the way that businesses using these VAT schemes pay their VAT bill:

Signing up for the Flat Rate Scheme means you’ll pay your VAT bill as a flat-rate percentage of your annual turnover, rather than accounting for the VAT you pay on purchases and collect on sales.
With the VAT Cash Accounting Scheme, you only pay the VAT on a sale once the customer pays you, rather than when you invoice them. It works for supplier payments to, so you only reclaim VAT that you pay to a supplier once you actually pay them.
On the Annual Accounting Scheme you’ll need to make regular (either monthly or quarterly) payments towards your expected VAT bill, even though you’ll only submit the return once a year.

You can sign up to the Annual Accounting Scheme and Flat Rate Scheme at the same time, but it’s not possible to use the FRS with the Cash Accounting Scheme.

Learn more about The Different Types of VAT Accounting Schemes.

What are the advance payments on the Annual Accounting Scheme?

If you register to the VAT Annual Accounting Scheme you can choose to make advance payments in either monthly or quarterly instalments, and a final payment when you submit your VAT return.

The amount you pay for each instalment towards your final VAT bill depends on your VAT return from the previous year. If you’re in your first year of VAT registration, you’ll pay an estimated amount. Each instalment will be 10% of your estimated VAT bill if you pay monthly, and 25% if you make quarterly payments.

The final payment is a ‘balancing payment’ to pay any VAT due once you submit your VAT return for the year. You’ll need to pay the balancing payment within two months of your VAT year ending.

Payment Intervals	Deadline for Payment	Instalment amount
Monthly payments	The end of months 4, 5, 6, 7, 8, 9, 10, 11 and 12	10% of your estimated VAT bill
Quarterly payments	Due at the end of months 4, 7 and 10	25% of your estimated VAT bill
Final payment	Within 2 months of month 12	A balancing payment if VAT is still owed

What happens if I overpay?

Don’t worry if you reach the end of your VAT year and discover that your advance payments are more than the final bill. If you overpay your VAT bill, you can apply for a refund.

How do I join the VAT Annual Accounting Scheme?

You can request to join the scheme when you first register for VAT, or at a later date using your online VAT account or by posting a VAT600AA form to HMRC. In some instances you can only apply by post (rather than online), such as when applying for a registration exception.

Can I leave the scheme?

You must leave the scheme if you’re no longer eligible to be in it. For instance, if turnover exceeds £1.35 million, or if any of the other exceptions to eligibility apply. You can also leave the scheme voluntarily if you want to.

Do I have to wait until the end of my VAT accounting period to register for the Annual Accounting Scheme?

You can apply to the Annual Accounting Scheme at any time, although applying in the middle of an accounting period rather than at the beginning can delay the process.

Authorising your use of the Annual Accounting Scheme takes effect from the first day of the period that you make your application. So, if you apply towards the end of your accounting period after submitting the return for that period, there will be a delay.

Do you need help submitting your VAT returns or getting set up on the VAT Annual Accounting Scheme? Our online accountants make sure your accounts work for you. Call 020 3355 4047 or get an instant online quote.

Who can use the VAT Annual Accounting Scheme?