VAT Annual Accounting Scheme: Is It Right for You

What Is the Annual Accounting Scheme?

The VAT Annual Accounting Scheme lets you submit one VAT return per year instead of four quarterly returns. During the year, you make advance payments to HMRC based on your estimated VAT liability, then settle any balance when you submit your annual return.

It's designed to reduce the administrative burden of quarterly filing while keeping a regular payment schedule.

How Advance Payments Work

You have two options for advance payments:

Option 1: Nine Monthly Payments

Make nine monthly payments, each equal to 10% of your estimated annual VAT liability. The payments start in month 4 of your VAT year and continue through month 12. Your annual return and any balancing payment are due two months after your year-end.

Option 2: Three Quarterly Payments

Make three quarterly payments, each equal to 25% of your estimated annual VAT liability. Payments are due at the end of months 4, 7, and 10 of your VAT year.

The estimated liability is usually based on your previous year's VAT return. HMRC will tell you the amount of each instalment.

Who Can Join?

To join the Annual Accounting Scheme, your estimated VAT taxable turnover must be £1,350,000 or less (excluding VAT). You must leave the scheme if your total business income exceeds £1,600,000 (including VAT).

You must also be up to date with your VAT returns and payments.

Advantages

Fewer returns. One annual return instead of four means less administration and fewer deadlines.

Budget more easily. Regular monthly or quarterly payments of known amounts help with cash flow planning.

More time to prepare. You have two months after your VAT year-end to file your annual return, giving you more time to get your figures right.

Fewer late filing risks. With only one return per year, there's less chance of missing a deadline and accumulating penalty points.

Disadvantages

Advance payments may exceed liability. If your VAT liability decreases during the year (perhaps because of lower sales or higher purchases), you'll overpay through the advance payments and only get a refund when you file your annual return.

Delayed VAT refunds. If HMRC regularly owes you a VAT refund (because your input tax exceeds your output tax), annual accounting delays that refund significantly. Under quarterly returns, you'd get refunds four times a year.

Less frequent reconciliation. Quarterly returns force you to check your VAT figures every three months. Annual filing might mean errors go unnoticed for longer.

Who Should Consider It?

The Annual Accounting Scheme works well for businesses that:

• Consistently owe VAT to HMRC (not regularly in a refund position)
• Have relatively stable and predictable turnover
• Find quarterly returns burdensome
• Want to simplify their VAT administration

It's not suitable for businesses that:

• Regularly reclaim more VAT than they owe
• Have highly variable turnover
• Want frequent refunds from HMRC

Combining with Other Schemes

You can combine the Annual Accounting Scheme with the Flat Rate Scheme — giving you both simplified accounting and reduced filing frequency.

You cannot combine it with the Cash Accounting Scheme.

How to Join or Leave

Apply to HMRC using form VAT600AA (online or by post). You can leave voluntarily by writing to HMRC.

With Accounted, whether you file quarterly or annually, Penny keeps your VAT records up to date and prepares your return when it's due.

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