What is the VAT Annual Accounting Scheme?

HMRC offers a numbers of different VAT schemes to try and make things easier for small businesses but knowing which one is most suitable for you can be a bit more tricky.  The VAT Annual Accounting Scheme is available to traders and small businesses designed to reduce their administrative burden and ease cashflow.

What is the VAT Annual Accounting Scheme?

Generally speaking VAT registered businesses submit four quarterly VAT returns & payments each year. However with the Annual Accounting Scheme businesses:

  • Submit one return per year (due two months after the end of your accounting period);
  • Make monthly advance payments towards the VAT on the annual VAT return (along with a balance payment, if required, when the annual VAT return is submitted).

Who Is Eligible to Join the VAT Annual Accounting Scheme

Anyone who is VAT registered can join the scheme if their taxable turnover is £1.35m or less over the next 12 months.

What is Taxable Turnover? This is the value of your sales that would be relevant for charging 20%.  To calculate whether you should be VAT registered you would need to exclude any sales that would be exempt from VAT (such as insurance or some financial services). 

You cannot use the VAT Annual Accounting Scheme if:

  • you have left the scheme in the last 12 months;
  • you’re is part of a VAT registered division or group of companies;
  • you’re behind on your  VAT Returns or payments;
  • you’re insolvent.

How Much VAT Must You Pay Each Month?

Once you have successfully applied to join the Annual Accounting Scheme HMRC will require that you make a payment each month of either:

  • 10% of your estimated VAT bill (monthly payments) or;
  • 25% (quarterly payments).

The percentage you pay is based on your previous VAT returns if you are already VAT registered or estimates if you are newly VAT registered.  You must make these payments electronically (bank transfer, standing order etc) but HMRC will confirm details of amounts and payment details when they agree you can join the scheme.

If you are already VAT registered and looking to switch you may need to complete your current VAT period under your existing scheme before switching to annual accounting (in other words you can’t switch mid-quarter).  This means for you may make less monthly payments before being required to submit your first annual VAT return.

Once you submit your annual VAT return you need to make a final ‘balancing’ payment which is the difference between your actual VAT bill and your advance payments.  Equally, if you have overpaid HMRC will send you a VAT refund.

Monthly VAT Payment Deadlines

Here are the payment deadlines for quarterly and monthly instalments, as set out by HMRC:

Payment Deadline
Monthly Due at the end of months 4, 5, 6, 7, 8, 9, 10, 11 and 12
Quarterly Due at the end of months 4, 7 and 10
Final payment Within 2 months of month 12

What Type of Businesses Suit the VAT Annual Accounting Scheme?

  • You want to reduce your VAT administrative burden;
  • You want more certainty around your cash payments;
  • You can predict your VAT liability with some certainty so you don’t end up trapped in a scheme where you know you are overpaying each month;
  • The scheme is probably not suitable if you are expecting repayments for example: a start up because you only get one repayment per year.

VAT Annual Accounting: How to Apply to Join the Scheme

Anita is a Chartered Accountant, turned blogger and creator of the ever popular free Go Self Employed Email Mini Course, which has been completed by hundreds of attendees all over the UK. Using her 10 years experience in accounting, tax and operations for Small Businesses, Anita is on a mission to make finance simple for the self employed, so they can stop stressing about tax & finances and focus on building profitable businesses which will give them the lifestyle they dream of.