What is the VAT Annual Accounting Scheme?

The VAT Annual Accounting Scheme allows you to submit one VAT return per year instead of four quarterly returns.

Instead of paying VAT based on each quarterly return, you make advance payments towards your annual VAT bill throughout the year. At the end of the year, you submit a single VAT return and either:

• Pay any remaining VAT due

• Or receive a refund if you have overpaid

The scheme is run by HMRC and is optional.

Who can use the Annual Accounting Scheme?

You can join the scheme if:

• You are VAT registered

• Your VAT taxable turnover is £1.35 million or less, excluding VAT

You must leave the scheme if your VAT taxable turnover goes over £1.6 million.

These thresholds are set by HMRC and should be checked if your turnover is increasing.

Full details are available on the HMRC website:
https://www.gov.uk/vat-annual-accounting-scheme

How do the payments work?

When you join the scheme, HMRC will agree how much you should pay in advance.

Most businesses make:

• 9 monthly instalments, each based on an estimate of your annual VAT bill

• Or 3 quarterly instalments

At the end of your 12 month accounting period, you submit your annual VAT return. This return shows your actual VAT liability for the year.

If your instalments were:

• Too low, you pay the difference

• Too high, you receive a refund

How is this different from standard VAT accounting?

Under standard VAT accounting:

• You submit a VAT return every three months

• You pay or reclaim VAT based on each return

Under Annual Accounting:

• You submit one VAT return per year

• You spread VAT payments across the year in instalments

The way VAT is calculated on your sales and purchases does not change. Only the timing of returns and payments is different.

Advantages of the Annual Accounting Scheme

• Fewer VAT returns to complete

• More predictable VAT payments

• Easier budgeting for some businesses

Disadvantages of the Annual Accounting Scheme

• You still need to keep VAT records up to date

• Instalments are based on estimates and may not match your actual liability

• If your turnover increases significantly, you may need to leave the scheme

Is the Annual Accounting Scheme right for you?

The scheme can suit businesses that:

• Want to reduce the number of VAT returns they submit

• Prefer spreading payments evenly across the year

• Have relatively stable turnover

It is important to consider whether regular quarterly calculations help you keep closer control of your VAT position. The scheme changes the timing of returns and payments, but not the underlying VAT rules.