VAT Annual Accounting Payments: Monthly vs Quarterly

Businesses in the VAT Annual Accounting Scheme normally make either nine monthly instalments or three quarterly instalments, followed by a balancing payment with the annual VAT return. HMRC sets the amounts and dates using the previous liability or an estimate.

Monthly instalments

Nine monthly payments are normally set at 10% of the estimated annual VAT liability. They usually begin at the end of month 4 of the annual accounting year and continue through month 12, subject to HMRC’s confirmed schedule.

Quarterly instalments

Three quarterly payments are normally 25% of estimated liability. They are generally due at the end of months 4, 7 and 10 of the annual period. The approval notice gives exact dates.

Balancing payment

After the annual period ends, submit the VAT return and pay the difference between final VAT liability and instalments already made. The normal deadline is two months after the annual accounting year end.

Worked example

Expected annual VAT is £40,000.

• Monthly option: nine instalments of about £4,000, totalling £36,000.
• Quarterly option: three instalments of about £10,000, totalling £30,000.

If the final return shows £43,500 due, the balance is £7,500 under the monthly option or £13,500 under the quarterly option. HMRC’s actual schedule controls.

What if the final return is a repayment?

If instalments exceed the liability, HMRC normally repays or credits the difference after processing the annual return. A business regularly in repayment may find Annual Accounting harms cash flow because it waits longer to establish the refund.

How HMRC estimates payments

For an established business, HMRC generally uses VAT liability from the previous 12 months. For a new registrant or changed business, it uses forecasts. One-off capital expenditure, acquisitions, disposals, rate changes and seasonal trade can make that estimate unreliable.

Can instalments be changed?

Yes. Contact HMRC where expected VAT is materially higher or lower. Supply management accounts, VAT forecasts and reasons. Do not unilaterally change Direct Debit amounts or skip a payment without agreement.

Direct Debit

Direct Debit simplifies payment but check that the instruction covers the scheme instalments and balancing amount. Keep sufficient funds and review bank limits. A failed collection can trigger interest and penalties.

Monthly versus quarterly

New or rapidly growing businesses

Update HMRC when actual liability outgrows the estimate. A low schedule does not cap the annual tax. Reserve VAT based on real monthly data, not only the instalment demanded.

Combining with Cash Accounting

If Cash Accounting is also used, output and input VAT follow payment dates. Annual instalments remain estimates, so reconcile actual cash-accounted liability throughout the year and request an adjustment if necessary.

Combining with Flat Rate Scheme

Flat Rate Scheme liability is based on VAT-inclusive turnover and the relevant percentage. Annual instalments should reflect that calculation and limited-cost status. A change of sector or limited-cost status can alter the balance.

Late or missed instalments

Late-payment interest and penalties can apply. Contact HMRC promptly about payment difficulty; a Time to Pay arrangement may reduce penalties but normally not interest. The annual return must still be filed on time.

Bookkeeping controls

1. Record each instalment against the VAT liability, not as an expense.
2. Calculate actual VAT at least quarterly.
3. Reconcile the VAT control account and HMRC statement.
4. Forecast the balancing payment.
5. Check turnover against the £1.6 million exit threshold.
6. Retain HMRC’s schedule and payment confirmations.

See the main Annual Accounting guide.

Official guidance

• HMRC: Annual Accounting payments
• VAT Notice 732

This guide is general information. Follow the amounts and dates in HMRC’s approval notice.