VAT Annual Accounting Scheme Explained

The VAT Annual Accounting Scheme simplifies your VAT obligations by allowing you to submit just one VAT Return each year instead of four. You make advance payments throughout the year towards your VAT bill, then submit your annual return and make a final balancing payment (or...

What is the VAT Annual Accounting Scheme?

How the scheme works

Under the Annual Accounting Scheme, you pay instalments of the VAT you expect to owe during the year, so you're not faced with a large VAT bill at the end of the year. You can choose to make either 9 monthly payments or 3 quarterly payments towards your end of year VAT liability.

When you join the scheme, HMRC calculates and tells you the instalment amounts and when they're due. If you think HMRC has got it wrong or your business circumstances change, you can ask them to amend the instalments. You can also make additional voluntary payments towards your end of year VAT bill if you wish.

At the end of your accounting year, you submit your VAT Return and pay any balance outstanding. If you've paid more than the amount due on your return, HMRC will refund the overpayment.

Eligibility requirements

You can join the Annual Accounting Scheme if:

You're a VAT-registered business (or registering for VAT)
Your estimated VAT taxable turnover is £1,350,000 or less in the next 12 months

VAT taxable turnover means the total value (excluding VAT) of any standard, reduced and zero rate supplies you're likely to make in the coming year. Do not include any exempt supplies or the value of any sales of your capital assets.

Who cannot join

You cannot use the scheme if you:

Left the scheme in the last 12 months
Are registered for VAT as part of a group or division of a company
Are not up to date with your VAT Returns or payments
Have a VAT debt that is getting bigger (although if you have a small debt and have agreed proposals with HMRC to clear it, you may be allowed to use the scheme)
Are insolvent

Staying in the scheme

Once you're in the scheme, you can remain in it until your VAT taxable turnover exceeds £1,600,000 per year. Unless you go over this limit significantly, you'll be withdrawn from the scheme at the end of the annual accounting year in which your turnover exceeds £1,600,000.

You must leave the scheme if your VAT taxable turnover is (or is likely to be) more than £1,600,000 at the end of the annual accounting year. If you realise during the year that your turnover has or will go over the £1,600,000 threshold, you must notify HMRC immediately and they'll remove you from the scheme.

Payment deadlines and amounts

The payment structure depends on the length of your accounting period.

For accounting periods between 4 and 12 months

You must make advance payments (either monthly or quarterly) and a final payment when you submit your VAT Return:

Monthly payments: Due at the end of months 4, 5, 6, 7, 8, 9, 10, 11 and 12
Quarterly payments: Due at the end of months 4, 7 and 10
Final payment: Within 2 months of month 12, or within 2 months of the end of your accounting period if it's 4 to 11 months long

Each monthly payment is 10% of your estimated VAT bill, while each quarterly payment is 25%. The amount is based on your previous VAT Returns (or estimated if you're new to VAT).

For accounting periods less than 4 months

You do not need to make advance payments. Your final payment is due within 1 month of the end of your accounting period.

All interim payments must be made electronically by Direct Debit, Standing Order or other electronic means.

VAT Return deadlines

If your accounting period is between 4 and 12 months long, your VAT Return is due 2 months after the end of your accounting period.

If your accounting period is less than 4 months long, your VAT Return is due 1 month after the end of your accounting period.

Most businesses need to keep digital VAT records and use software to submit VAT Returns under Making Tax Digital for VAT.

Benefits of the scheme

The main advantages are:

Helps smooth out your cash flow by paying a set amount each month or quarter
You can make additional payments as and when you can afford to
Only one VAT Return to complete each year instead of four
You get 2 months to submit your annual VAT Return and balancing payment, instead of one
You can align your VAT year with the end of your business tax year to simplify your end of year routines

Things to consider

The scheme would not suit your business if you regularly reclaim VAT, because you'll only be able to get one refund a year (when you submit the VAT Return).

Some businesses find that the discipline of quarterly VAT Returns helps them to keep on top of their VAT and other business records. If you use annual accounting, you'll still need to keep on top of your records to avoid problems at year end.

Instalments under the scheme must be paid electronically and do not qualify for any extension to due dates.

Using other schemes alongside Annual Accounting

You can use the Annual Accounting Scheme with several other VAT schemes, including:

Flat Rate Scheme (if your VAT turnover is £150,000 or less)
Cash Accounting Scheme
Retail Schemes
VAT Margin Schemes
Capital Goods Scheme
Tour Operators Margin Scheme

How to join the scheme

If you're not already registered for VAT, you can register for VAT and apply for the Annual Accounting Scheme at the same time.

If you're already registered for VAT, you can apply online or by post using form VAT600AA. You'll need:

Your business name (as shown on your VAT Certificate of Registration)
Your business address (main place of business)
Your VAT registration number
Your phone number
Your annual accounting year end (the month you want your annual return to finish)
Your frequency of payment (monthly or quarterly)
Your method of interim payments

HMRC will notify you in writing if your application is accepted. The letter will tell you the amount and timing of the interim payments calculated for you, your chosen method of electronic payment, and the due date for your annual return and balancing payment.

Your authorisation to use the Annual Accounting Scheme takes effect from the first day of the period in which your application is finalised, so give HMRC enough time to process your application.

How to leave the scheme

You can leave the scheme at any time by writing to HMRC at:

BT VAT

HM Revenue and Customs

BX9 1WR

HMRC will confirm when you can leave. From this date, you must account for your VAT in the usual way.

You must wait 12 months before you can rejoin the scheme.

Conditions of using the scheme

When using the scheme you must:

Make interim payments by the date HMRC gives you
Make interim payments by Direct Debit, Standing Order or other electronic means
Submit the annual VAT Return and any balancing payment by the due date shown on the return

If you do not follow these conditions, you may be removed from the scheme. If you do not make the balancing payment on time, you will be charged late payment interest and may receive a late payment penalty. If you do not send the return on time, you will receive penalty points or a late submission penalty.

Sources

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.