The VAT annual accounting scheme

The scheme in figures

Joining

Estimated taxable turnover of £1.35 million or less in the next 12 months (GOV.UK)

Leaving

Must leave if taxable turnover is, or is likely to be, more than £1.6 million at the end of the annual accounting year

Monthly instalments

9 payments, each 10% of the estimated VAT bill, at the end of months 4 to 12 (GOV.UK)

Quarterly instalments

3 payments, each 25% of the estimated VAT bill, at the end of months 4, 7 and 10

Return and balancing payment

Due 2 months after the end of the accounting period

Rejoining

Not within 12 months of leaving

How the instalments are set

For a business registered for 12 months or more, VAT Notice 732 bases the instalments on the previous year's VAT liability: each monthly instalment is 10% of it and each quarterly instalment 25%. A newer business uses its estimated liability.

A business may also make voluntary extra payments towards the year-end bill, in multiples of £5 (VAT Notice 732). Payment must be electronic, for example by Direct Debit or internet banking (GOV.UK).

A worked example

For example, a client's VAT for last year came to £24,000. On monthly instalments it pays £2,400 at the end of each of months 4 to 12, which is £21,600 in total (GOV.UK: deadlines).

If the annual return shows £25,500 due, the balancing payment is £3,900, due with the return 2 months after the year end. If the return shows £20,000, the business has overpaid by £1,600 and HMRC repays it.

On quarterly instalments the same client would pay £6,000 at the end of months 4, 7 and 10, which is £18,000, leaving the rest for the balancing payment.

Who cannot join

• A business that left the scheme in the last 12 months (GOV.UK: eligibility).
• A business that is part of a VAT group.
• A business that is not up to date with its returns or payments.
• A business that is insolvent.

Joining and leaving

A business that is not yet registered can register and join at the same time. A registered business applies online or by post (GOV.UK: join or leave).

To leave, the business writes to HMRC, which confirms the date. From that date it accounts for VAT in the usual way. It must leave if it stops being eligible, and VAT Notice 732 warns that a business that does not keep up its instalments may be removed from the scheme.

Running an annual accounting year

1. Agree the instalments

   Instalments follow the previous year's liability, or an estimate for a newer business (VAT Notice 732). Set up Direct Debit or internet banking payments, because payment must be electronic (GOV.UK).

2. Pay from month 4

   Monthly payers pay at the end of months 4 to 12. Quarterly payers pay at the end of months 4, 7 and 10.

3. Watch turnover

   If taxable turnover is, or is likely to be, more than £1.6 million at the end of the year, the business must leave (GOV.UK).

4. Keep digital records through the year

   The annual return still rests on Making Tax Digital records kept for the whole year (VAT Notice 700/22).

5. Send the return

   Send the annual return and the balancing payment within 2 months of the year end (GOV.UK). For an accounting period of 4 to 11 months, the balancing payment is due within 2 months of the end of that period.

6. Review the instalments

   Compare the year's liability with the instalments paid. The new year's instalments follow the liability just declared (VAT Notice 732).

Fit with other schemes

VAT Notice 732 confirms the annual accounting scheme can be combined with the flat rate scheme and with the cash accounting scheme. See the flat rate scheme and limited cost traders and the cash accounting scheme.

GOV.UK notes that the scheme would not suit a business that regularly reclaims VAT, because it gets one repayment a year.

Questions