Key takeaways
- You can join if you expect VAT taxable turnover of £1.35 million or less in the next 12 months, and must leave if it goes over £1.6 million.
- You file one VAT return a year, due two months after the end of your annual accounting period.
- During the year you pay instalments based on last year's VAT: nine monthly payments of 10% or three quarterly payments of 25%.
- A balancing payment, or a repayment, is made with the annual return.
- It suits steady businesses that want fewer returns and predictable payments; it rarely suits businesses that usually get VAT back.
The VAT Annual Accounting Scheme replaces four quarterly returns with one annual return. You still pay VAT through the year, but in fixed instalments based on your previous liability rather than in amounts that change every quarter. For a small business with stable trading it removes three deadlines a year and makes cash flow easier to plan.
How the scheme works
- HMRC sets your interim payments, normally based on your net VAT liability for the previous 12 months. If you are newly registered, they are based on an estimate of your liability.
- You pay the interim instalments during the year, usually by Direct Debit or standing order.
- At the end of the year you complete one VAT return covering the full 12 months.
- You pay any balance with the return, or HMRC repays you if the instalments came to more than the VAT due.
The annual return and the balancing payment are due two months after the end of your annual accounting period, rather than the usual one month and seven days.
Interim payment options
| Option | How much | When |
|---|---|---|
| Monthly | 9 payments, each 10% of last year’s VAT bill | End of months 4 to 12 of the accounting year |
| Quarterly | 3 payments, each 25% of last year’s VAT bill | End of months 4, 7 and 10 |
Worked example
A joinery business’s net VAT for its last year was £24,000. It joins the scheme on monthly instalments, so it pays £2,400 a month from the end of month 4 to the end of month 12, a total of £21,600. When it prepares the annual return the actual liability is £25,500, so it pays the balancing figure of £3,900 with the return two months after the year end.
Had the year been quieter, with liability of £19,000, HMRC would have repaid the £2,600 overpaid instalments after the return was processed.
You can ask HMRC to change the instalment amounts if your turnover changes significantly, for example if the business shrinks and the payments would clearly be too high.
Who can join
You can join if you expect your VAT taxable turnover in the next 12 months to be £1.35 million or less, excluding VAT. You can join when you first register or at any time after.
You cannot use the scheme if:
- you left the scheme in the last 12 months
- your business is part of a VAT group or registered as a VAT division
- you are insolvent
You apply online or on the paper application form. If you also want the Flat Rate Scheme, there is a combined form. Annual accounting can also be combined with the Cash Accounting Scheme.
When you must leave
You must leave the scheme if your VAT taxable turnover is more than £1.6 million at the end of an annual accounting period, or you expect it to go over £1.6 million in the next 12 months. You can also leave voluntarily at any time by telling HMRC, after which you return to quarterly returns. You cannot rejoin for 12 months after leaving.
Advantages
- One return a year instead of four, which reduces the chance of a late submission and its penalty points.
- Predictable payments. Fixed instalments are easy to budget for and spread the cost evenly.
- More time for the return. Two months after the year end rather than one month and seven days.
- Instalments are outside late payment penalties. HMRC’s late payment penalties do not apply to annual accounting interim instalments, although HMRC can remove you from the scheme if you do not keep up the payments.
Disadvantages
- Repayment businesses wait longer. If you normally reclaim more VAT than you pay, for example an exporter, you only get one repayment a year. Most such businesses are better off on monthly or quarterly returns.
- Instalments do not follow your trading. If income falls, payments based on last year can be too high until you ask HMRC to change them. If income rises, a large balancing payment builds up.
- Less frequent review. Quarterly returns force a regular check of your VAT position. With an annual return, errors can go unnoticed for longer, so reconcile your records monthly anyway.
- Making Tax Digital still applies. You keep digital records and file the annual return through MTD-compatible software; the scheme changes timing, not record keeping.
Who it suits
The scheme tends to suit:
- small businesses with steady, predictable turnover and VAT liabilities
- owners who would rather not deal with quarterly deadlines
- businesses that want to budget for VAT like a monthly bill
It tends not to suit businesses that usually receive VAT repayments, businesses with seasonal or fast-changing turnover, and businesses that would rather match VAT payments closely to actual sales.
Frequently asked questions
When is the VAT Annual Accounting return due?
Two months after the end of your annual accounting period, along with any balancing payment.
How are the interim payments worked out?
They are based on your VAT liability for the previous 12 months, or an estimate if you are newly registered. Monthly instalments are 10% each, nine times a year; quarterly instalments are 25% each, three times a year.
Can I use the Annual Accounting Scheme and the Flat Rate Scheme together?
Yes. Many small businesses do, and there is a single form to apply for both.
What is the turnover limit for the Annual Accounting Scheme?
You can join if your expected VAT taxable turnover is £1.35 million or less, and you must leave if it exceeds £1.6 million.
Do late payment penalties apply to annual accounting instalments?
No. HMRC’s late payment penalties do not apply to interim instalments under the scheme, but they do apply to the balancing payment due with the annual return.
Sources
Rates, thresholds and rules in this guide were checked against HMRC and GOV.UK guidance in October 2026. Tax rules change, so check the current position on GOV.UK or with a qualified adviser before acting. This guide is general information, not personal advice.