VAT Guide: The Annual Accounting Scheme


In keeping with the theme of VAT schemes, this week we are looking at the annual accounting scheme and whether it could benefit your business.

What is the annual accounting scheme?

Under the annual accounting scheme you only have to deliver to HRMC one VAT return per year, which really helps to reduce the burden of paperwork for small business owners.

You have to make regular payments for VAT based on an estimate calculated by HMRC using last year’s returns. This means you must make 9 monthly payments commencing in month 4 at 10% of the prior years return.

If 9 payments do not suit your business you can apply to pay the instalments quarterly instead.

A balancing payment or refund is then made once the annual VAT return has been filed.

Is my business eligible to join the scheme?

To join the scheme you must be a VAT registered business with turnover below £1.35m in the next 12 months.

Your business will not be permitted to join the scheme if you are not up to date with VAT payments to HMRC, your business is insolvent or your business left the scheme under 12 months ago.

You must leave the scheme if you turnover is expected to be in excess of £1.6m at the end of the accounting year.

HMRC permit you to operate both this scheme and the flat rate scheme or cash accounting scheme alongside this scheme should you wish to utilise the benefits of multiple schemes.

Advantages of using this scheme

• Reduced paperwork as you are only required to file one VAT return per year. You also receive 2 months to submit your return instead of the usual one month.
• You are aware of the monthly payments in advance which aids cash flow forecasting.
• You can choose to submit your return to coincide your year end date or select to have your year end during your quiet time of year (handy for seasonal businesses!).
• Paying monthly smoothes cash flow and reduces the quarterly burden on cash.


• If your business is seasonal you may find that the fixed instalments feel high during quiet times of year and low during the peak season.
• If you business is very volatile it may make estimating the amounts due difficult, causing you to underpay or overpay.


When businesses go VAT registered most Directors simply opt for the standard quarterly accrual VAT scheme without considering the other options available.

If you are a director of a small business you should be prioritising cash flow management and aiming to reduce as much red tape as possible so you can spend more time driving the business forward. This scheme does both of those and can also be operated alongside other VAT schemes giving you even more benefits. It is certainly worth considering.

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