Last updated: 14 October 2026
How does the VAT Annual Accounting Scheme work?
Under the Annual Accounting Scheme, you submit one VAT return a year instead of four, and pay VAT in advance through 9 monthly or 3 quarterly instalments based on your previous year’s VAT. You then submit the annual return and pay any balance within 2 months of the end of your accounting year. You can join if your estimated VAT-taxable turnover for the next 12 months is £1.35 million or less, and you must leave if it goes over £1.6 million.
How the payments work
| Payment | When | Amount |
| 9 monthly instalments | End of months 4 to 12 | Each 10% of last year’s VAT bill |
| Or 3 quarterly instalments | End of months 4, 7 and 10 | Each 25% of last year’s VAT bill |
| Balancing payment | With the annual return, 2 months after the year-end | Actual VAT due minus instalments paid |
New businesses pay instalments based on an estimate of their VAT liability.
Benefits
- One VAT return a year, less admin
- Fixed instalments make budgeting easier
- Two months to file the annual return instead of 1 month and 7 days
- You can combine it with the cash accounting or flat rate scheme
Drawbacks
- If your turnover falls, you may overpay through instalments until the year-end
- Businesses that usually get VAT refunds receive them only once a year
- You still need Making Tax Digital records, kept throughout the year
- A large balancing payment can be a shock if turnover grows
Who it suits
The scheme suits businesses with steady turnover that usually pay VAT, and owners who want fewer deadlines. It’s less suitable for businesses that are often in repayment, such as exporters, or whose turnover is falling.
Example
A consultancy paid £24,000 VAT last year. Under the scheme it pays 9 monthly instalments of £2,400 (10%), totalling £21,600. At the year-end, its actual VAT is £26,000, so it pays a balancing payment of £4,400 with its annual return. If its actual VAT had been £20,000, HMRC would repay £1,600.
How to join and leave
Apply online or by post using form VAT600AA, or VAT600AA/FRS to join with the flat rate scheme. You can leave voluntarily at any time, and you must leave if turnover goes over £1.6 million. HMRC can also remove you if you don’t pay instalments.
Penalties
Late instalments and late annual returns are subject to the late payment penalties and penalty points rules. For annual returns, the points threshold is 2.
Keeping on track during the year
Even with one return, reconcile your VAT account each quarter. Compare actual VAT with the instalments you have paid, so you can ask HMRC to change them early if the gap is large. This avoids a big balancing payment or a long wait for an overpayment to come back after the year-end.
Frequently asked questions
Can I change my instalment amount?
Yes, ask HMRC if your turnover changes significantly.
Can I pay instalments by direct debit?
Yes, and it is recommended.
Does annual accounting reduce my VAT?
No, it changes timing only.
Do I still need MTD software?
Yes, records must be kept digitally.
Related: choosing a VAT scheme and standard VAT accounting.
Talk to Accotax
Want this handled for you? Our team at Accotax can help with the VAT annual accounting scheme. See our VAT accountants service, or contact us for a free, no-obligation quote.
This page is general guidance based on HMRC rules for the 2026/27 tax year, checked against gov.uk on 14 October 2026. It is not personal advice, so speak to an accountant about your own situation.
