Annual accounting VAT scheme
Using standard VAT accounting, you must complete four VAT returns each year. Any VAT due is payable quarterly, and any VAT refunds due to you are also repayable quarterly.
Using annual VAT accounting, you make nine monthly or three quarterly interim payments throughout the year. You only need to complete one VAT return at the end of the year when you either make a balancing payment or receive a balancing refund. Annual accounting can reduce your paperwork and make it easier to manage your cash flow.
You can use annual accounting if your estimated turnover during the next tax year is not more than £1.35 million. If you are already using annual accounting you can continue to do so until your estimated turnover exceeds £1.6 million.
On this page:
- What is annual accounting for VAT?
- Who can use annual accounting for VAT?
- Who cannot use annual accounting for VAT?
- The pros and cons of annual accounting for VAT
- Joining and leaving the annual accounting for VAT scheme
- When and how to pay annual accounting VAT
- Using annual accounting for VAT with other schemes
- For more information
What is annual accounting for VAT?
Using standard VAT accounting, you must complete four VAT returns each year. Any VAT due to HMRC is payable quarterly, and any VAT refunds due to you are also repayable quarterly.
Using annual VAT accounting, you make either nine monthly or three quarterly interim payments throughout the year. You only need to complete one VAT return at the end of each year. At that point you must pay any outstanding amount. If you have overpaid you will receive a refund
If you have been registered for VAT for less than 12 months, your interim payments are based on an estimate of the VAT you expect to owe for the coming year. If you have been registered for VAT for 12 or more months, your interim payments are based on your previous year's actual VAT payments.
Who can use annual accounting for VAT?
You can use annual accounting for VAT if your estimated turnover ('taxable supplies') for the coming year is not more than £1.35 million. Taxable supplies include; any standard, reduced and zero rate sales and other taxable supplies, and excludes VAT, exempt supplies and capital asset sales.
Once you are using annual accounting you can continue to do so as long as your estimated turnover remains below £1.6 million.
Who cannot use annual accounting for VAT?
You cannot use annual accounting if:
- your estimated turnover is over £1.35 million per year
- you are registered for VAT as a division of a company or part of a group
- you have previously used annual accounting within the past 12 months
- you are not up to date on your VAT payments
- you are insolvent
The pros and cons of annual accounting for VAT
There are a number of reasons why annual accounting for VAT can be beneficial to your business, but there are also some potential disadvantages.
Benefits of annual accounting
- You only need to complete one VAT return per year, instead of four.
- You get two months rather than one month to complete and send in your annual VAT return and pay the balance of your VAT payable
- You can better manage your cash flow by paying a fixed amount in monthly or quarterly instalments.
- You can make additional payments as and when you wish.
- You can join from the day you register for VAT or if you are already registered.
Disadvantages of annual accounting
- If you regularly reclaim VAT, you will only get one repayment per year.
- If your turnover decreases, your interim payments may be higher than your VAT payments would be under the standard VAT accounting. You would have to wait until the end of the year to receive your refund.
- You must still keep all required VAT records and accounts.
Joining and leaving the annual accounting for VAT scheme
Joining the annual accounting scheme
To join the annual accounting scheme, you must fill out an application form. You can join the annual accounting scheme and the flat rate scheme at the same time using one form.
Get form VAT 600 AA to apply for joining the annual accounting scheme
Read about the flat rate scheme
Once you have joined the annual accounting scheme you must notify HMRC if there are significant changes which may affect the amount of VAT you pay. Examples include:
- if your turnover is or is likely to be much higher or lower than the previous year
- if your turnover has or is expected to be more than £1.6 million, for instance if you buy another business
- if your VAT payable will, or has, increased by at least 10 per cent since the last time your instalments were calculated
Send your form to:
HM Revenue & Customs
Imperial House
77 Victoria Street
Grimsby
DN31 1DB
How to leave the annual accounting scheme
You may leave the scheme voluntarily at any time by notifying HMRC.
You must leave the scheme if your turnover is over £1.6 million. HMRC
may remove you from the cash accounting scheme for a number of reasons,
including:
- if you calculate your VAT incorrectly
- if you are convicted of a VAT offence
- if you are assessed for a penalty for VAT evasion
If you leave the annual accounting scheme, you may not rejoin for at least 12 months.
When and how to pay annual accounting VAT
If you choose to pay your VAT by nine monthly instalments, each payment will be 10 per cent of your previous year's VAT liability, or 10 per cent of your estimated VAT liability if you have been registered for VAT for less than 12 months. Your payments will be due by the end of months 4-12 of your annual accounting year.
If you choose to pay your VAT by three quarterly instalments, each payment will be 25 per cent of your previous year's VAT liability, or 25 per cent of your estimated VAT liability if you have been registered for VAT for less than 12 months. Your payments will be due by the end of months 4, 7 and 10 of your annual accounting year.
The balance of your actual VAT payable for your annual accounting year, based upon the VAT return that you complete at the end of the year, is due two months after the end of your annual accounting year.
All of your payments must be made electronically. Instalments may be paid by direct debit, standing order or BACS. Your end of year balancing payment cannot be paid by direct debit.
How to fill in an annual VAT return
Annual VAT returns are completed in exactly the same way as quarterly VAT returns, except that after calculating the annual VAT payment due, you deduct the interim payments you have already made to arrive at your end-of-year balancing payment due to you or HMRC.
Find out how to fill in a VAT return
Using annual accounting for VAT with other schemes
You may be able to use annual accounting for VAT together with some of the following VAT schemes:
Cash accounting scheme
Unlike standard VAT accounting where VAT is due when you issue an invoice,
using cash accounting you don't have to pay VAT until your customers
pay you.
Get information about the cash accounting
scheme
Flat rate scheme
Using the flat rate scheme you simply pay a fixed percentage of your turnover as VAT.
Get information about the flat rate scheme
Retail schemes
If you are a retailer, there are several schemes where you can simplify your calculation of VAT by not having to account for VAT on each individual sale.
Get information about the retail schemes
Margin schemes for second-hand goods, art, antiques, collectibles
If you buy or sell second-hand goods, antiques, collectibles or art, you only need to account for VAT on the difference between the price you paid for an item and the price at which you sell it - your margin.
Get information about the second-hand goods margin schemes
Tour operator's margin scheme
The tour operator's margin scheme makes VAT accounting easier for tour operator's who buy and sell travel, accommodation and certain other services internationally.
Get information about the tour operator's margin scheme
For more information
More about annual accounting for VAT in VAT Notice 732
Use the VAT schemes wizard to find out what VAT scheme is right for your business
