Annual VAT Return: How the VAT Annual Accounting Scheme Works

An annual VAT return allows eligible VAT-registered businesses to submit one VAT Return each year instead of the usual four quarterly returns.

Under the VAT Annual Accounting Scheme, businesses make regular advance VAT payments during the year and then submit one annual return showing the actual VAT due.

The scheme can reduce administration and make VAT payments more predictable, but it is not suitable for every business.

Businesses that regularly reclaim VAT may find the scheme less helpful because repayments are generally only made after the annual return is submitted.

What Is VAT Annual Accounting?

Annual accounting is a voluntary HMRC VAT scheme designed to simplify VAT reporting. Instead of submitting four VAT Returns during a normal 12-month period, a business using the scheme submits:

One VAT Return per year

During the year, the business makes regular advance payments towards its estimated VAT liability.

After the accounting year ends, the business calculates the actual VAT due and either:

• Makes a final balancing payment
• Receives a VAT refund if too much was paid

The scheme changes how often VAT is reported and paid. It does not change the normal VAT rates charged to customers. For a broader overview of the scheme, see our guide to VAT Annual Accounting and how it differs from standard quarterly reporting.

Who Can Use the VAT Annual Accounting Scheme?

A VAT-registered business can generally join if its expected VAT-taxable turnover is £1.35 million or less during the next 12 months.

Taxable turnover generally includes the value of:

• Standard-rated sales
• Reduced-rated sales
• Zero-rated sales

It does not normally include VAT-exempt sales.

Businesses should use turnover excluding VAT when assessing the £1.35 million threshold.

Who Cannot Join the Annual Accounting Scheme?

You cannot normally join if:

• Your Business Is Insolvent
• You Are Not Up to Date With VAT Returns or Payments
• You Left the Scheme During the Previous 12 Months
• Your Business Is Part of a VAT-Registered Division or Group

HMRC may also refuse or remove businesses that do not comply with the scheme’s payment and filing requirements.

What Is the Turnover Limit for Annual VAT Accounting?

The main threshold for joining the scheme is:

£1.35 million of expected VAT-taxable turnover or less

Once a business is already using the scheme, it can normally remain until taxable turnover exceeds:

£1.6 million

A business that expects turnover to exceed the £1.6 million limit should review whether it needs to leave the scheme.

How Many VAT Returns Do You File Under Annual Accounting?

You submit one VAT Return per accounting year instead of four quarterly returns. This is the main administrative benefit of the scheme.

For businesses that spend significant time preparing quarterly returns, annual accounting can reduce the frequency of:

• Return preparation
• VAT reconciliations
• Filing deadlines
• HMRC submissions

However, businesses must still maintain accurate VAT records throughout the year. Businesses uncertain about their filing obligations should first check whether they need to submit a VAT return, as annual accounting changes the frequency rather than removing the requirement.

How to File an Annual VAT Return Under the Annual Accounting Scheme

Businesses using the VAT Annual Accounting Scheme submit one VAT Return for their accounting year instead of the usual four quarterly returns. The return must show the VAT due for the entire accounting period, even though advance payments have already been made.

Businesses using annual accounting should still understand their wider tasks as a VAT-registered business, including record keeping, invoicing, payment and filing responsibilities.

Steps to Complete Your Annual VAT Return

Before submitting the return, businesses should also consider whether their VAT control system is strong enough to identify coding errors, missing invoices and reconciliation issues.

1. Confirm Your Accounting Period: Check the annual VAT period and submission deadline in your HMRC VAT account.
2. Review Sales Records: Calculate the output VAT due on taxable sales during the year.
3. Check Business Purchases: Identify eligible input VAT and verify supporting invoices.
4. Reconcile VAT Accounts: Review credit notes, imports, reverse charges and adjustments.
5. Complete the Nine VAT Return Boxes: Report the appropriate VAT liabilities, recoverable VAT, sales and purchase values.
6. Submit Through Compatible Software: Send the annual VAT Return using Making Tax Digital software, unless HMRC has granted an exemption.
7. Reconcile Advance Payments: Compare the annual VAT liability with the instalments already paid to establish the remaining balance or overpayment.

Businesses should keep their VAT records updated throughout the year rather than waiting until the annual filing deadline. Businesses looking for VAT returns Fulham support can receive guidance on preparing annual VAT submissions, reconciling advance payments and maintaining accurate records under HMRC’s Annual Accounting Scheme.

Does Annual Accounting Mean You Only Pay VAT Once a Year?

No. This is a common misunderstanding.

Although you submit only one annual VAT return, you still make payments during the year.

Businesses normally choose between:

• 9 monthly advance payments
• 3 quarterly advance payments

A final balancing payment is then made after the accounting period ends if the advance payments were lower than the actual VAT liability.

How Do Monthly VAT Payments Work?

Monthly instalments are normally:

10% of the estimated annual VAT liability

There are 9 monthly payments.

They are generally due at the end of:

• Month 4
• Month 5
• Month 6
• Month 7
• Month 8
• Month 9
• Month 10
• Month 11
• Month 12

HMRC calculates the amount using previous VAT information or an estimate where the business is newly VAT registered.

Example of Monthly Annual Accounting Payments

Suppose HMRC estimates that your annual VAT liability will be:

£20,000

Each monthly payment would normally be:

£20,000 × 10% = £2,000

You would make 9 payments:

9 × £2,000 = £18,000

When the annual VAT Return is submitted, the actual VAT liability is calculated.

If the final VAT bill is £21,500, the balancing payment would be:

£21,500 – £18,000 = £3,500

How Do Quarterly VAT Payments Work?

Businesses can instead choose to make 3 quarterly advance payments.

Each payment is normally:

25% of the estimated annual VAT liability

The payments are generally due at the end of:

• Month 4
• Month 7
• Month 10

The remainder is dealt with through the final balancing payment.

Example of Quarterly Annual Accounting Payments

Suppose the estimated annual VAT liability is:

£40,000

Each quarterly payment would normally be:

£40,000 × 25% = £10,000

Three advance payments would total:

£30,000

If the final annual VAT liability is £42,000, the business would owe:

£42,000 – £30,000 = £12,000

as the balancing payment.

When Is the Annual VAT Return Due?

For a standard 12-month annual accounting period, the annual VAT return and balancing payment are normally due within 2 months of the end of the accounting year.

For example:

If the annual accounting period ends on:

31 December

the annual VAT Return and balancing payment would normally be due by:

The end of February

Businesses should always check the exact due date shown by HMRC.

What If the Accounting Period Is Shorter Than 12 Months?

Different rules can apply where the accounting period is shorter.

For periods between 4 and 11 months, the final payment is normally due within 2 months of the end of the accounting period.

If the accounting period is shorter than 4 months, advance payments are generally not required and the final payment is normally due within 1 month of the period end.

What Is the Balancing Payment?

The balancing payment is the difference between:

The advance VAT payments already made and The actual VAT liability shown on the annual VAT Return If the business has paid too little during the year, it pays the difference. If the business has paid too much, HMRC can refund the excess.

Are Advance VAT Payments Deducted From an Annual VAT Return?

No. Advance VAT payments made under the Annual Accounting Scheme are not deducted when completing the VAT Return boxes. The annual VAT Return must show the full VAT liability for the accounting period.

HMRC separately accounts for the advance payments already received when determining the final amount outstanding. Businesses should also understand what is included in a VAT return so that advance payments are not confused with the figures reported in the return boxes.

For example:

The annual VAT Return reports the £25,000 net VAT liability. The £18,000 already paid is then taken into account separately.

This distinction helps prevent businesses from incorrectly reducing the VAT figures declared on their annual return.

What Happens If You Overpay VAT During the Year?

If your advance payments exceed the actual VAT liability, the annual return will show that HMRC owes you money.

HMRC can then repay the overpayment.

This can happen where:

• Turnover Falls
• Costs Increase
• Input VAT Increases
• The Initial Estimate Was Too High

The business does not usually receive that refund during the year because the full VAT position is only finalised when the annual VAT Return is submitted.

Can HMRC Change Your Advance Payments?

Yes.

If your business circumstances change significantly, you can ask HMRC to adjust your advance payments.

This may be appropriate where:

• Turnover Has Fallen Significantly
• Turnover Has Increased
• The VAT Liability Has Changed Materially
• Your Business Model Has Changed

This can help avoid paying substantially more or less than the likely final VAT liability.

Is Annual Accounting Good for Cash Flow?

It can be.

One advantage of annual VAT accounting is that regular payments can make VAT outflows easier to predict.

Instead of facing a potentially large quarterly VAT bill, the business can spread expected payments across the year.

This can help with:

• Cash-Flow Forecasting
• Budgeting
• Monthly Financial Planning

However, the scheme does not automatically improve cash flow in every situation. Businesses seeking an accounting firm Wimbledon can benefit from professional cash-flow forecasts and VAT planning to determine whether the Annual Accounting Scheme suits their payment patterns.

When Can Annual Accounting Hurt Cash Flow?

The scheme may be less suitable for businesses that frequently receive VAT repayments.

For example, a business that regularly has more input VAT than output VAT might normally receive quarterly refunds.

Under annual accounting, it may need to wait until the annual VAT Return before receiving its repayment.

This can create cash-flow pressure.

HMRC specifically notes that the scheme may not suit businesses that regularly reclaim VAT because they normally receive only one repayment each year.

Should Businesses That Regularly Reclaim VAT Use Annual Accounting?

Usually, they should consider the cash-flow impact carefully.

A business may regularly reclaim VAT because it:

• Exports Goods
• Makes Zero-Rated Supplies
• Has High Capital Expenditure
• Is Investing Heavily
• Has Significant VAT-Bearing Costs

Waiting until year end for a repayment could mean financing that VAT for many months.

For these businesses, normal quarterly VAT accounting may be more suitable.

Does Annual Accounting Change How VAT Is Calculated?

No. The scheme mainly changes the timing of returns and payments. 

Businesses still need to calculate:

• Output VAT
• Input VAT
• VAT Due
• VAT Reclaimable

under the normal VAT rules.

The Annual Accounting Scheme does not create a different VAT rate or a separate method for determining taxable sales. Businesses needing a broader refresher can also review how VAT works under the current UK rules, including output VAT, input VAT and taxable supplies.

Can Annual Accounting Be Used With Cash Accounting?

Yes. The Annual Accounting Scheme can generally be used alongside the VAT Cash Accounting Scheme where the relevant conditions are met.

Under Cash Accounting, VAT is generally accounted for when money is received or paid rather than purely when invoices are issued.

Combining the schemes can potentially simplify VAT administration for some smaller businesses.

Can Annual Accounting Be Used With the Flat Rate Scheme?

Yes. A business that meets the relevant conditions can use Annual Accounting with the Flat Rate Scheme.

The Flat Rate Scheme has its own turnover limits.

Businesses should therefore check eligibility for both schemes separately.

Does Making Tax Digital Apply to Annual VAT Returns?

Yes. Most VAT-registered businesses still need to comply with Making Tax Digital for VAT. Using the Annual Accounting Scheme does not generally remove the requirement to:

• Maintain Digital VAT Records
• Use Compatible Software
• Submit the VAT Return Digitally

The difference is that the business submits one annual VAT Return rather than four quarterly returns. Businesses that need help with digital records, compatible software or submission processes can also use MTD VAT support in London.

Which Software Can Be Used for an Annual VAT Return?

Businesses can use compatible VAT software that supports their HMRC VAT obligations. This may include cloud accounting software or other MTD-compatible systems. Businesses that need ongoing support may also consider working with accountants experienced in VAT-registered companies to review records, software and return preparation.

The software should be able to:

• Maintain VAT Records
• Calculate VAT
• Prepare the Annual VAT Return
• Submit the Return to HMRC

A VAT return accountant can also help businesses check whether the scheme is suitable and make sure the annual return is prepared correctly. Businesses considering the Annual Accounting Scheme may benefit from professional annual VAT return accounting services in Wimbledon when reviewing scheme eligibility, advance payments, MTD requirements and the final balancing return.

How Do You Join the VAT Annual Accounting Scheme?

If you are already VAT registered, you can apply to HMRC to join the scheme.

If you are registering for VAT for the first time, you may be able to join Annual Accounting as part of the VAT registration process.

HMRC will confirm whether the application has been accepted.

The confirmation normally sets out:

• The Amount of Advance Payments
• Payment Dates
• Payment Frequency
• Annual Return Due Date

How Do You Pay VAT Under Annual Accounting?

Businesses using the scheme must normally pay VAT electronically.

Payment methods can include methods such as:

• Direct Debit
• Standing Order
• Online Banking
• Other Approved Electronic Payment Methods

HMRC will tell the business when payments are due and how much needs to be paid.

What Does HMRC Pay VAT Mean Under This Scheme?

Businesses searching HMRC pay VAT often need to distinguish between the advance instalments and the final balancing payment.

Under Annual Accounting:

During the year

You pay the agreed monthly or quarterly instalments.

At year end

You submit the annual VAT Return.

After the return

You either:

• Pay the Balancing Amount
• Receive a Refund if You Overpaid

Businesses should not wait until the annual return to make all VAT payments unless HMRC has specifically agreed a different arrangement.

What Happens If You Miss an Advance VAT Payment?

Missing an advance VAT payment under the Annual Accounting Scheme can cause compliance problems, even though the payment is an instalment towards the business’s annual VAT liability.

HMRC may:

• Contact the Business About the Overdue Payment
• Take Appropriate Debt Recovery Action
• Review Whether the Business Is Complying With the Scheme
• Remove the Business From the Annual Accounting Scheme

The normal VAT late-payment interest and penalty rules do not apply to individual Annual Accounting Scheme instalments in the same way as they apply to an overdue final VAT balancing payment.

However, late-payment interest and applicable penalties may arise if the final balancing payment is not made by its deadline. Businesses experiencing payment difficulties should contact HMRC promptly and review their VAT payment arrangements.

Businesses can reduce avoidable problems by reviewing VAT compliance and common pitfalls before missed payments or filing issues develop into wider HMRC concerns.

What Happens If the Annual VAT Return Is Late?

The annual VAT Return is subject to the normal VAT late-submission penalty rules. Because an annual accounting business files only once a year, its late-submission penalty-point threshold is normally different from businesses filing monthly or quarterly.

An annual filer generally reaches the financial penalty threshold after 2 late submission penalty points. Businesses should therefore not assume that having fewer returns means filing deadlines are less important.

Annual filers should understand the VAT late filing penalties that can apply when submission deadlines are missed.

When Must a Business Leave the Annual Accounting Scheme?

A business normally needs to leave the scheme if:

• It Becomes Ineligible
• VAT-Taxable Turnover Exceeds £1.6 Million
• HMRC Withdraws Approval
• Scheme Conditions Are Not Met

A business can also choose to leave voluntarily.

Once a business leaves, it generally has to wait 12 months before rejoining. Businesses looking for a tax specialist Fulham Broadway can receive support with reviewing VAT turnover thresholds, understanding scheme exit requirements and planning the transition to standard VAT reporting.

Annual Accounting vs Quarterly VAT Returns

Neither method is automatically better.

The right option depends on the business’s VAT position and cash-flow pattern.

Who Might Benefit From Annual Accounting?

The scheme may suit businesses that:

• Want Fewer VAT Filing Deadlines
• Usually Pay VAT Rather Than Receive Refunds
• Have Relatively Predictable Turnover
• Want Regular VAT Payments for Budgeting
• Have Straightforward VAT Affairs

A stable business with predictable VAT liabilities may find the scheme particularly useful. Businesses with predictable liabilities and relatively straightforward VAT affairs may want to explore using the VAT Annual Accounting Scheme in more detail before applying.

Who Might Not Benefit?

Annual Accounting may be less suitable where:

• The Business Frequently Reclaims VAT
• Turnover Changes Significantly
• VAT Liabilities Are Highly Seasonal
• The Business Needs Frequent VAT Refunds
• Advance Payments Would Regularly Be Too High

Businesses should therefore consider both administration and cash flow before joining.

What Should You Review Before Joining?

A useful review includes:

1. Estimate Next Year’s VAT-Taxable Turnover
2. Check the £1.35 Million Joining Limit
3. Review Previous VAT Liabilities
4. Check Whether You Usually Pay or Reclaim VAT
5. Consider Monthly vs Quarterly Payments
6. Forecast Cash Flow
7. Review Making Tax Digital Software
8. Check Existing VAT Debts
9. Compare Annual and Quarterly Accounting
10. Decide Whether Reduced Administration Justifies the Change

Working with a VAT accountant Farringdon businesses can consult may help assess scheme eligibility, compare annual and quarterly VAT reporting, and evaluate the effect on cash flow. Businesses needing professional help with eligibility, cash flow and scheme selection can also review VAT services in London before changing their reporting method.

CASE STUDY: Helping a Business Decide Whether Annual VAT Accounting Was Suitable

A growing professional services business contacted our Farringdon office after looking for a simpler way to manage its VAT compliance.

The company normally submitted four quarterly VAT Returns each year and wanted to know whether switching to the VAT Annual Accounting Scheme could reduce administration and make VAT payments easier to forecast.

CIGMA Accounting reviewed the company’s expected taxable turnover, previous VAT liabilities, payment history and cash-flow pattern. The business was comfortably within the scheme’s joining threshold and generally paid VAT to HMRC rather than receiving regular repayments.

We compared the existing quarterly system with annual accounting and explained that filing one annual VAT return would not mean paying VAT only once a year. The company would still make regular monthly or quarterly advance payments, followed by a balancing payment or refund after the annual return was submitted.

We also reviewed whether the estimated instalments would create cash-flow pressure and considered how Making Tax Digital requirements would continue to apply despite the reduced filing frequency.

Because the company had relatively stable turnover and predictable VAT liabilities, annual accounting offered a practical way to reduce the number of return deadlines while maintaining more regular VAT outflows throughout the year.

The client left with a clearer understanding of their position, options, and next steps.