VAT Annual Accounting Scheme: UK 2026 Guide

The VAT Annual Accounting Scheme lets an eligible business submit one VAT return a year while making advance instalments toward the expected liability. A balancing payment or repayment follows the annual return. It reduces return frequency but does not reduce VAT due or remove Making Tax Digital record requirements.

Who can join?

A VAT-registered business can normally apply where estimated VAT-taxable turnover for the next 12 months is £1.35 million or less. It generally must be up to date with VAT returns and payments and cannot be insolvent or have left the scheme within the previous 12 months.

VAT-taxable turnover includes standard-, reduced- and zero-rated supplies but excludes VAT itself and generally excludes exempt and outside-the-scope income.

When must a business leave?

A business normally leaves when annual VAT-taxable turnover exceeds £1.6 million or it no longer meets scheme conditions. HMRC can also remove a business for persistent non-compliance or where continued use creates risk.

How payments are calculated

HMRC normally bases instalments on the previous 12 months’ VAT liability or an estimate for a new applicant. The business can usually choose:

• nine monthly instalments: normally 10% of estimated annual liability each;
• three quarterly instalments: normally 25% of estimated annual liability each.

The remaining balance is due with the annual return. Payment schedules and dates are confirmed by HMRC and depend on the annual accounting period.

Example

If expected annual VAT is £24,000, quarterly instalments may be £6,000 each. If the final return shows £26,500 due, the £8,500 difference is paid by the balancing deadline after deducting £18,000 already paid. If the final liability is lower, HMRC repays or credits the excess.

Annual return deadline

The annual VAT return and balancing payment are normally due two months after the end of the annual accounting period. Use HMRC’s scheme notice and online account for the exact date; it differs from the usual one month and seven days.

Joining the scheme

Apply through the VAT online account or form VAT600AA. HMRC confirms the start date, annual period and instalment schedule. Continue filing normal returns until the approval date and do not assume an application changes an existing deadline.

Can instalments be changed?

Ask HMRC to adjust payments where the expected liability changes significantly. Provide forecasts and supporting figures. Continuing to pay an outdated low amount can create a large balance; overpaying unnecessarily harms cash flow.

Advantages

• one VAT return each year;
• regular instalments support budgeting;
• an extra month to complete the annual return compared with normal quarterly timing;
• less frequent filing administration.

Disadvantages

• a large balancing payment if instalments are too low;
• slower repayment for businesses regularly owed VAT;
• bookkeeping must still be maintained throughout the year;
• errors can remain undetected longer;
• changes in trade can make estimates inaccurate.

Annual Accounting with other VAT schemes

It can often be combined with Cash Accounting or the Flat Rate Scheme if each scheme’s conditions are met. Calculations and records must follow the interaction rules. Some specialist schemes are incompatible or require separate treatment.

Making Tax Digital

The business must keep required VAT records digitally and submit the annual return using compatible software. One return a year does not mean transactions can be entered only at year end. Regular reconciliation remains essential.

Cash-flow management

Review VAT liability at least quarterly even under annual filing. Reconcile instalments to the VAT control account, reserve cash for the balancing amount and update HMRC after major changes such as loss of a customer, acquisition, rate change or unusual capital purchase.

Leaving the scheme

Notify HMRC, submit any required final annual return and follow the transition back to normal stagger periods. Outstanding instalments do not disappear. Avoid double-counting transactions when changing periods.

Is the scheme suitable?

1. Forecast annual output and input VAT.
2. Assess whether the business is usually a payer or repayment trader.
3. Compare monthly versus quarterly instalments.
4. Check turnover against entry and exit thresholds.
5. Review bookkeeping quality and cash reserves.
6. Model interaction with Cash Accounting or Flat Rate Scheme.

Official guidance

• HMRC: VAT Annual Accounting Scheme
• VAT Notice 732

This guide is general information. HMRC confirms the actual period, instalments and deadlines.