Can a new business use the Annual Accounting Scheme?

New businesses can join the Annual Accounting Scheme once registered for VAT, provided expected turnover is within the threshold. However, they must estimate their VAT liability carefully as there is no previous year's return to use as a base.

What records do I need under the Annual Accounting Scheme?

You still need to maintain full VAT records throughout the year — sales invoices, purchase invoices, VAT account entries, and the VAT control account. The only difference is that you complete just one return per year rather than four.

How does the instalment base work when last year's bill is known?

HMRC uses the higher of your estimated current-year VAT liability and your previous year's actual liability as the instalment base. This prevents businesses from deliberately setting low estimates to defer payment. The calculator above uses this logic automatically.

Is the Annual Accounting Scheme suitable for businesses with seasonal VAT?

It can work for seasonal businesses, but the fixed instalment approach may create cashflow mismatches — you pay equal instalments even during low-revenue months. A balancing payment or refund at year-end corrects any over or underpayment.

What is the exit threshold for Annual Accounting?

You must leave the Annual Accounting Scheme if your annual VAT-taxable turnover exceeds £1,600,000. You may also choose to leave voluntarily at the end of your VAT year if the scheme no longer suits your business.

How does annual accounting compare to quarterly returns in terms of VAT payment timing?

Under quarterly returns, you pay four times a year within 1 month and 7 days of each quarter-end. Under annual accounting, you make 9 monthly or 3 quarterly advance payments, then a balancing payment within 2 months of year-end. The timing difference is modest for most businesses.

Can I reclaim VAT repayments quickly under Annual Accounting?

If you are regularly in a VAT repayment position (e.g., you export goods), Annual Accounting may not be suitable as you only reclaim repayments once per year. Quarterly returns allow more frequent reclaims, improving cashflow for exporters and zero-rated suppliers.

Are there penalties for missing instalment payments?

Yes. Missing or underpaying advance instalments can lead to HMRC default surcharges or late payment penalties under the new penalty system. It is important to pay each instalment on time even if your actual VAT liability is uncertain.

How do I leave the Annual Accounting Scheme?

You can write to HMRC to leave voluntarily at the end of your current annual accounting period. You must submit your final annual return and pay any outstanding balance. After leaving, you revert to quarterly VAT returns.

What months do I pay under the monthly option?

Under the monthly option you make 9 equal payments from month 4 to month 12 of your VAT year. No payments are due in months 1-3. The balancing payment follows approximately 2 months after the year-end (month 14).

What is the quarterly payment schedule?

Quarterly instalments are paid at the end of months 4, 7, and 10 of your VAT year. The balancing payment is due 2 months after the year-end. So for a March year-end: pay at end of July, October, January, then balance due in May.

How accurate must my VAT estimate be?

HMRC requires a reasonable estimate. If you significantly underestimate to gain a cashflow advantage and the difference is large, HMRC may penalise the underpayment. Using last year's actual figures as a floor (as required) ensures a reasonable base.

Does the Annual Accounting Scheme reduce my VAT bill?

No. Annual Accounting does not change the amount of VAT you pay — only the timing and frequency of returns. The same VAT rules, rates, and calculation methods apply as under quarterly accounting.

Can I change from monthly to quarterly instalments?

Yes, within the Annual Accounting Scheme you can choose your instalment frequency. Contact HMRC to change your payment schedule, ideally before the start of a new annual VAT year to keep accounting clean.

What if I stop trading during my annual VAT period?

If you cease trading mid-year, you must deregister for VAT and submit a final VAT return covering the period up to deregistration. The Annual Accounting Scheme rules no longer apply once you are deregistered.

How does the Annual Accounting Scheme interact with Making Tax Digital?

Under Making Tax Digital (MTD) for VAT, all VAT-registered businesses must use compatible software to keep digital VAT records and submit returns digitally. Annual Accounting businesses must comply with MTD — their one annual return must be submitted via MTD-compatible software.

Can I check my instalment payments online?

Yes. You can view your VAT account, see instalment due dates, and confirm payments received via your HMRC online Government Gateway account. It is good practice to reconcile these regularly against your internal records.

What is the total advance payments as a percentage of annual VAT?

Under the monthly option: 9 × 10% = 90% of estimated annual VAT is paid as advance instalments. Under the quarterly option: 3 × 25% = 75% of estimated annual VAT is paid in advance. The remainder is the balancing payment.

Do instalment payments cover interest or penalties?

Advance instalments cover your VAT liability only. Interest and penalties (if any) are separate and calculated on any underpaid amounts. The instalment schedule assumes you will pay the correct amount.

Are there situations where I must leave Annual Accounting immediately?

Yes. You must leave immediately if HMRC requires you to do so (e.g., serious compliance issues), or if you are convicted of a VAT offence. You must also leave if your turnover exceeds the £1,600,000 exit threshold.

Can an agent manage Annual Accounting on my behalf?

Yes. An authorised agent (such as your accountant) can manage your VAT Annual Accounting registration, instalment payments, and annual return submission on your behalf through HMRC's agent services.

What happens to the balancing payment if it is a large amount?

Large balancing payments arise when actual VAT significantly exceeds advance instalments — often because turnover grew unexpectedly. There is no formal instalment arrangement for the balancing payment; it is due in full within 2 months of year-end. Businesses with volatile turnover may prefer quarterly returns to avoid large year-end surprises.

What are the disadvantages of the Annual Accounting Scheme?

Main disadvantages: only one chance per year to reclaim VAT refunds (poor for exporters); requires good cash management to ensure the balancing payment is covered; complex exit process if turnover grows. Businesses that regularly reclaim VAT are generally better off with quarterly returns.

VAT Annual Accounting Scheme Calculator 2025/26

Payment Schedule Calculator

Estimated annual VAT liability (£)

Last year's actual VAT bill (£, if known)

Payment frequency

Monthly (9 payments) Quarterly (3 payments)

Instalment base

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Each instalment

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Total instalments paid

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Estimated balancing payment

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Period	Payment type	Amount

Balancing payment is due within 2 months of your annual VAT year-end. Actual amount depends on final VAT liability.

How the Annual Accounting Scheme Works

Under the VAT Annual Accounting Scheme, eligible businesses file just one VAT return each year instead of four. During the year, you make advance payments — either 9 monthly instalments or 3 quarterly instalments — based on an estimated annual VAT liability. After the year-end, you submit your annual return and settle any remaining balance (or receive a refund) within two months.

Joining threshold: £1,350,000 annual taxable turnover (net). Exit threshold: £1,600,000. You can also combine Annual Accounting with Cash Accounting or the Flat Rate Scheme.

Monthly vs Quarterly Instalments

Monthly instalments are each 10% of the estimated annual liability, paid in months 4 through 12. Quarterly instalments are 25% of the estimated annual liability, paid at the end of months 4, 7, and 10. The monthly approach totals 90% paid in advance; the quarterly approach totals 75%. The remainder becomes the balancing payment.

The instalment base uses the higher of your estimated current-year liability and last year's actual bill (where known). This prevents businesses from underestimating instalments to hold back VAT cash.

Benefits and Limitations

One VAT return per year — significant time and administrative saving
Predictable monthly or quarterly cash outflows aid budgeting
Can be combined with Cash Accounting and Flat Rate Scheme
VAT refunds only received once per year — unsuitable for businesses regularly in repayment position
Large balancing payments can arise if turnover grows unexpectedly

Frequently Asked Questions

The VAT Annual Accounting Scheme lets eligible businesses submit just one VAT return per year instead of four quarterly returns. During the year you make 9 monthly or 3 quarterly advance payments. At the end of the year you submit your single return and make a balancing payment (or receive a refund) within 2 months of your year-end.

Businesses with annual VAT-taxable turnover of £1,350,000 or less (excluding VAT) can join the Annual Accounting Scheme. You must leave the scheme if your turnover exceeds £1,600,000.

Monthly instalments are set at 10% of your estimated annual VAT liability. If you know last year's actual bill, HMRC uses the higher of the two figures as the basis. You make 9 payments (months 4 to 12 of your VAT year), with the balancing payment due within 2 months of year-end.

Quarterly instalments are set at 25% of your estimated annual VAT liability. You make 3 payments at the end of months 4, 7, and 10. A balancing payment is then due within 2 months of your year-end.

The balancing payment is the difference between your actual total VAT for the year and the instalments already paid. If your actual liability is higher than instalments, you pay the difference. If lower, HMRC issues a refund. The balancing payment is due within 2 months of your annual VAT year-end.

Yes. Annual Accounting and Cash Accounting can be used together, giving you both a single annual return and the cashflow benefit of accounting for VAT only when payments are made and received.

Yes. Annual Accounting can be combined with the Flat Rate Scheme. You pay advance instalments based on your estimated flat rate VAT liability, and submit your annual flat rate return at year-end.

The main advantage is reduced administrative burden — only one VAT return per year instead of four. This saves time and accounting costs. Predictable monthly or quarterly payments also make cashflow planning easier.

The balancing payment is due within 2 months of the end of your annual VAT accounting period. For example, if your year-end is 31 March, the balancing payment and annual return are both due by 31 May.

If your advance instalments exceed your actual annual VAT liability, HMRC will refund the difference after you submit your annual return. The repayment is processed in the normal way.

Apply to HMRC online through your Government Gateway account (VAT1AA form). You can join at the start of a new VAT year. Approval is usually automatic for eligible businesses below the threshold.

Monthly instalments spread the cost over 9 smaller payments (each 10% of annual liability), which can ease cashflow. Quarterly instalments mean 3 larger payments (each 25% of annual liability) but require fewer transactions. Both options result in the same total advance payments before the balancing payment.