The VAT annual accounting scheme lets eligible UK businesses file just one VAT return a year instead of four, paying instalments on account during the year and a balancing payment with the return. It can be a useful cash-flow planning tool for stable businesses but is not a fit for everyone, and Making Tax Digital adds extra considerations.
How the scheme works
You estimate your annual VAT and pay it across the year, smoothing cash flow.
| Item | Detail |
|---|---|
| Eligibility (turnover) | Up to £1.35 million in the next 12 months |
| Exit threshold | £1.6 million |
| Returns per year | 1 |
| Payments per year | 9 monthly or 3 quarterly instalments |
| Balancing payment | With annual return, two months after period end |
You can also combine annual accounting with the flat rate scheme or cash accounting.
Worked example
A consultancy with stable annual VAT liability of £24,000, on the monthly schedule:
| Month | Payment |
|---|---|
| Months 4 to 12 | £2,400 monthly (10% × £24,000) |
| With annual return | Balance based on actual VAT for year |
| If actual is £25,000 | Pay £3,400 with return |
| If actual is £22,000 | Refund £200 with return |
Compared with quarterly returns, the business gives up some VAT cash flow but gains predictability.
Pros
- Single return to prepare each year — less admin
- Predictable cash flow with monthly instalments
- Two months extra to file vs quarterly returns
- Combines well with flat rate and cash accounting schemes
- Smaller chance of late filing penalties — only one deadline
- Particularly useful for seasonal businesses that can shape instalments
Cons
- Refund-position businesses can wait up to a year to recover VAT
- Growth past £1.6m forces an exit mid-year
- Estimates can leave large balancing payment surprises
- Less continuous data flow into management accounts
- Still subject to Making Tax Digital record-keeping rules
- HMRC can vary instalments if it disagrees with your estimate
Who it suits
| Business profile | Likely fit |
|---|---|
| Stable consultancy or services | Good |
| Seasonal retail with year-round bookkeeping | Good |
| Construction subcontractor in CIS reverse charge | Mixed |
| High-growth startup | Poor (will exceed £1.6m) |
| Frequent VAT refunds | Poor (cash flow lost) |
| Pre-revenue with high input VAT | Poor |
Final thoughts
The annual return is filed through MTD-compatible software. For help with the return and the interim payments, ask for accounting help.