Key takeaways
- The VAT Annual Accounting Scheme simplifies the VAT return and payment process for eligible businesses.
- Eligibility criteria include a taxable turnover not exceeding £1.35 million, a valid registration number, and meeting certain exceptions.
- The advantages of this scheme are streamlined administration, reduced workload & flexible payments. Drawbacks must be taken into account before enrolling in it.
In short: The VAT Annual Accounting Scheme lets eligible UK businesses submit one VAT return a year instead of four. You make advance payments in monthly or quarterly instalments, then a balancing payment two months after your accounting period ends. You can join if your estimated VAT taxable turnover is £1.35 million or less.
Do you want to simplify your UK business's VAT returns and payments and manage your cash flow better? The VAT Annual Accounting Scheme could be the answer. This guide covers how the scheme works, who can join, how to enrol, your payment options, and tips to get the most from it.
What is the VAT Annual Accounting Scheme?
The VAT Annual Accounting Scheme lets eligible businesses submit one VAT return a year and pay their VAT bill in instalments. It is designed to ease the burden of VAT returns and payments. Under the Standard VAT Accounting Scheme, you submit a VAT return four times a year and pay quarterly. The Annual Accounting Scheme replaces this with one yearly return and advance payments towards your final VAT bill.
You can make these advance VAT payments in monthly or quarterly instalments. This gives you flexibility to manage cash flow during the annual accounting period.
To use the Annual Accounting VAT Scheme, your estimated VAT taxable turnover must not exceed £1.35 million. You must also be up to date with your VAT returns and payments. You must keep digital VAT records, as the government requires. You also need to use software to submit your VAT returns.
The scheme suits businesses with stable or predictable turnover. It may not suit businesses that regularly reclaim VAT or whose turnover changes a lot.
Who is eligible for the Annual Accounting Scheme?
You are eligible for the VAT Annual Accounting Scheme if your estimated taxable turnover is £1.35 million or less. You must also be VAT registered with a valid VAT registration number. Knowing the eligibility rules helps you decide whether the scheme fits your business.
Businesses that are behind with their VAT returns or payments cannot use the scheme. The scheme may also not suit businesses that expect to reclaim VAT regularly, because they only get one refund a year.
Some exceptions make a business ineligible to join the VAT Annual Accounting Scheme. You cannot join if you left the scheme in the last twelve months. You also cannot join if you are behind with your VAT payments or VAT returns, or if you are insolvent.
So check your business’s eligibility and these exceptions before you decide whether the Annual Accounting Scheme is right for you.
How do you join the VAT Annual Accounting Scheme?
You join the VAT Annual Accounting Scheme online through your HMRC account, or by post using the VAT600AA form. Once you know you are eligible, enrolling is the next step.
The sections below walk through both the online and postal applications, so you can enrol smoothly.
Online application
To apply for the VAT Annual Accounting Scheme online, log in to your HMRC account and open the VAT600AA form on the HM Revenue & Customs website. Fill in the details it asks for, such as your business name, address and VAT registration number. When you are done, select ‘Submit’ at the bottom of the page.
HMRC will then review your application and contact you about the outcome.
Postal application
To apply for the VAT Annual Accounting Scheme by post, print and complete HMRC form VAT600AA. Then send it to HM Revenue & Customs. Make sure you fill in all the details on the form and send it to the right address.
After you send the form, wait for HM Revenue & Customs to reply about your application.
How do VAT payments work under the Annual Accounting Scheme?
Under the VAT Annual Accounting Scheme, you make advance VAT payments in monthly or quarterly instalments, then a final balancing payment. This flexibility helps you manage cash flow during the annual accounting period.
The final payment is called a ‘balancing payment’. It is the difference between your advance payments and the actual VAT bill on your VAT return. It is due two months after the end of the accounting period.
The subsections below look at each payment option in more detail.
Monthly payments
Under the VAT Annual Accounting Scheme, you can make nine monthly instalments towards your VAT liability during the VAT accounting period. Each one is 10% of your estimated VAT bill for the year. Spreading your VAT liability over the year eases the pressure on your cash flow. We cover this in more detail in 6 Tips to Save on Your VAT Bill.
The amounts are based on your previous returns, or estimated if you are new to VAT. HMRC writes to tell you when each instalment is due and how much it is. You must pay electronically, for example by Direct Debit or internet banking.
Quarterly instalments
If you prefer to pay less often, you can choose quarterly instalments under the Annual Accounting Scheme. You pay 25% of your estimated VAT bill each quarter. With fewer payment deadlines, you can manage your cash flow more easily.
Keep in mind that your actual VAT bill may be higher than your estimated VAT bill. If so, you pay the difference in your balancing payment. This option works best for businesses with predictable turnover through the year.
If you overpay, you can get a refund, which gives you peace of mind and financial security.
How do you manage your annual VAT return?
You manage your annual VAT return by keeping complete, up-to-date records of all suppliers and purchases. Good management of your annual VAT return is essential under the VAT Annual Accounting Scheme. Accurate records mean you have the right information when you submit your VAT return.
You must also include input invoices in the VAT return for the matching tax period. Stay organised and careful with your records. This makes your annual VAT return easier to submit and keeps you compliant with HMRC rules.
Under the Annual Accounting Scheme, you must also submit your annual VAT return electronically through the specified portal. This helps you submit on time and accurately, and lowers the risk of errors or penalties.
By following these best practices, you can get the full benefit of the Annual Accounting Scheme and keep your business on a strong financial footing.
What are the pros and cons of the Annual Accounting Scheme?
The VAT Annual Accounting Scheme reduces paperwork and makes cash flow easier, but it may not suit businesses that reclaim VAT often. Weigh the pros and cons before you commit, to see if it is the best option for your business.
The subsections below look at the advantages and disadvantages of the scheme, to help you make an informed decision.
Advantages
The VAT Annual Accounting Scheme offers several advantages for eligible businesses. It streamlines admin and removes the work of quarterly VAT returns. This frees you to focus on other important parts of your business.
You can also choose monthly or quarterly advance VAT payments. This helps you manage cash flow, reduces financial stress and supports growth. Overall, the Annual Accounting Scheme can improve efficiency and financial stability for eligible businesses.
Disadvantages
Despite its advantages, the VAT Annual Accounting Scheme may not suit every business. One drawback is that you need to keep track of future taxable supplies, which can be slow and difficult. Interim payments based on prior years may also be higher than needed, which can hurt your cash flow.
Businesses that regularly reclaim VAT may find the scheme unsuitable, because they can only claim refunds once a year. Consider these drawbacks and check whether the scheme fits your business’s needs and goals.
How do you leave the VAT Annual Accounting Scheme?
You leave the VAT Annual Accounting Scheme by writing to HMRC, which will then confirm your leaving date. You may decide the scheme no longer suits your business, or you may no longer be eligible. Either way, write to HMRC as soon as possible.
Be aware of what leaving means. You will move back to standard VAT accounting and must meet its requirements.
After you leave the Annual Accounting Scheme, you account for VAT in the usual way. That means submitting a VAT return every three months and paying any VAT due. You may need to adjust your financial management and record-keeping to comply with standard VAT accounting. You can also read What is a VAT Loan? A Guide for UK Businesses.
How can you get the most from the Annual Accounting Scheme?
You get the most from the VAT Annual Accounting Scheme by managing cash flow carefully and following best practices. For example, making regular payments to HMRC through the year can prevent financial strain and support steady growth. Watching for changes in your turnover and in the UK VAT rate also helps you make the right payments. Read more in our guide: Is the Flat Rate VAT Scheme Right for Your Business?.
To make the most of the Annual Accounting Scheme, stay compliant with the rules that apply to it. Be mindful of possible tax implications too. Keep up to date with the latest information and best practices. That way you get the full advantages of the VAT Annual Accounting Scheme and improve your business’s financial management.
Conclusion
The VAT Annual Accounting Scheme offers many benefits for eligible businesses, including simpler admin, better cash flow management and improved tax planning. Once you understand the eligibility rules, how to enrol and your payment options, submitting VAT returns and paying VAT gets easier. Your business’s financial management will improve in the process.
Do you need help with your VAT compliance? Book a free call with one of our VAT experts to find bespoke solutions for your business, optimize your VAT costs, and reach millions of new potential customers.
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Frequently asked questions
What is the annual accounting scheme for VAT returns?
The Annual Accounting Scheme is a method of paying VAT that enables businesses to make regular payments towards their annual VAT bill and submit one VAT return each year.
Small businesses can benefit by being able to pay their VAT more flexibly, rather than having to file four separate returns annually.
Who is eligible for the VAT annual accounting scheme?
If you’re a VAT registered business with an estimated taxable turnover of less than £1.35 million in the upcoming 12 months, you're eligible to join the VAT Annual Accounting Scheme.
How do I leave an annual accounting scheme?
To leave the Annual Accounting Scheme, you must write to HMRC and provide notice. Your eligibility in the scheme will determine when you can leave, and after leaving, you must wait 12 months before re-entering.
Additionally, if your annual taxable turnover exceeds £1.6 million, you must leave the scheme.
Can you do VAT returns annually?
Yes, you can do VAT returns annually through the Annual Accounting VAT Scheme.
What are the payment options under the VAT Annual Accounting Scheme?
The VAT Annual Accounting Scheme offers payment options of monthly or quarterly instalments for advance VAT payments.
