VAT Payments on Account

Introduction

If your business owes HMRC more than £2.3 million in VAT within any 12-month period, you'll be required to make payments on account. These are advance payments towards your VAT bill, paid twice during each VAT quarter in addition to your normal quarterly return. Understanding how these payments work is essential for managing your cash flow and avoiding penalties.

What are VAT payments on account?

VAT payments on account are advance payments towards your VAT liability. Rather than paying all your VAT in one go when you submit your quarterly return, you make two interim payments during the quarter, then a final balancing payment when you file your return.

HMRC will notify you if you need to start making these payments. The requirement applies if you submit VAT returns quarterly and your VAT liability exceeds £2.3 million in any 12-month period. This threshold includes VAT on imports and moving goods into and out of excise warehouses.

How payments on account are calculated

When you first exceed the £2.3 million threshold, HMRC calculates your payments based on your annual VAT liability in that period. They divide your annual VAT liability by 24 to arrive at your instalment amount. If you've been in business for less than 12 months, they calculate the payments proportionally.

The calculation doesn't include VAT on imports and excise warehouse movements unless you've already accounted for this on your VAT return and it's included in your VAT liability.

HMRC reviews your VAT liability every quarter. If your total VAT liability increases by 20% or more, they'll automatically adjust your payment amounts upwards. If your liability decreases by 20% or more, you can request a reduction.

The annual cycle and reference years

Payments on account follow an annual cycle that begins in April, May, or June, depending on which VAT return 'stagger' you're on. HMRC bases your payment amounts on your liability during what they call the 'reference year', and they recalculate this each year.

Here's how the reference years work for each stagger:

Stagger 1 (quarters ending March, June, September, December): Your reference year ends in September, and your annual cycle begins the following April.

Stagger 2 (quarters ending April, July, October, January): Your reference year ends in October, and your annual cycle begins the following May.

Stagger 3 (quarters ending May, August, November, February): Your reference year ends in November, and your annual cycle begins the following June.

For example, if you're on Stagger 1, your VAT liability for the year ending in September determines your payment amounts from April through to March the following year.

When payments are due

You'll receive two types of payments under this arrangement:

Payments on account: These are due on the last working day of the second and third months of every VAT quarter, regardless of your period end date. The standard 7-day extension for electronic payments does not apply to these payments.

Balancing payments: These are due with your VAT return and must clear into HMRC's bank account by the last day of the month (if you have standard period end dates).

HMRC will write to you with a payment schedule showing how much to pay and all your payment deadlines. You can also access this schedule through your VAT online account.

If a deadline falls on a weekend or bank holiday, your payment must clear HMRC's bank account on the last working day before this, unless you pay by bank transfer using Faster Payments.

How to file returns and make payments

Continue filing your quarterly VAT returns online as normal. Crucially, do not adjust any figures on your return to record the payments on account you've already made. Instead, calculate the net amount shown on your return and deduct any payments on account you've already paid in that accounting period. Pay HMRC the difference.

If your return shows you're due a repayment, HMRC will refund the payments on account you paid during that quarter.

You can pay using:

• Approval through your online bank account
• Online or telephone banking, CHAPS or Bacs
• Debit or corporate credit card online
• At your bank or building society
• Standing order

Penalties and interest for late payment

Make sure cleared funds reach HMRC's bank account by the deadline. Late payments on account will incur late payment interest. If you fail to make your balancing payment on time, you may also face late payment penalties in addition to interest.

HMRC will take immediate action to recover unpaid amounts and may consider transferring you from quarterly to monthly VAT returns if you repeatedly pay late.

Changes to your payments

HMRC automatically increases your payments on account if your VAT liability increases by 20% or more during an annual cycle. They'll notify you in writing about any increase, and you'll see these changes in your VAT online account.

If your total VAT liability falls below 80% of the liability used to calculate your current payments, you can request a reduction. This applies whether you're looking back at a completed year or forward at the current year.

If your total VAT liability falls below the £2.3 million threshold, HMRC may remove you from the payments on account arrangement entirely.

Special circumstances

VAT groups: For businesses registered as part of a VAT group, HMRC looks at the whole group's VAT liability to determine whether payments on account are required and how much to pay. The representative member is responsible for making payments, but all group members are jointly and severally liable.

Divisional registration: If you've registered your business in the names of its divisions, HMRC treats each division as a separate business and uses each division's individual VAT liability to determine payment requirements.

Sources

• VAT payments on account
• Check when you can account for import VAT on your VAT Return
• Sign in to your VAT online account
• Pay your VAT bill
• Late payment interest if you do not pay VAT or penalties on time
• How late payment penalties work if you pay VAT late

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