Debitoor Dictionary

Accounting terms explained in a simple way

Annual Accounting VAT Scheme – What is the VAT Annual Accounting Scheme

The Annual Accounting VAT Scheme is a method of paying VAT whereby businesses make quarterly or monthly payments towards their annual VAT bill, but only submit one VAT Return per year.

Debitoor invoicing software makes it easy to keep on top of your VAT. Find out more about VAT-registration and working with Debitoor.

Under the Standard VAT Accounting Scheme, VAT-registered businesses must submit a VAT Return and make payments four times per year.

The Annual Accounting scheme simplifies this process by allowing businesses to submit one VAT Return a year and make payments towards their final VAT bill in instalments. Payments must be made through Direct Debit, Standing Order or another electronic format.

The Annual Accounting VAT Scheme can be used in combination with either the Cash Accounting VAT Scheme and the Flat Rate VAT Scheme.

Who can use the Annual Accounting VAT Scheme?

To join the VAT Annual Accounting Scheme, you must be a VAT-registered business and have an estimated taxable turnover of under £1.35 million. VAT taxable turnover refers to the total of everything you sell that is not exempt from VAT.

You cannot join the scheme if you have left the scheme in the past 12 months, are not up to date with your VAT payments or VAT Returns, or if you are insolvent.

If you stop being eligible or reach a turnover of more than £1.6 million, you must leave the Annual Accounting VAT Scheme.

Payments under the Annual Accounting VAT Scheme

Under the VAT Annual Accounting Scheme, you must make payments towards your final VAT bill throughout the accounting year. You can choose between monthly and quarterly payments.

The amount you pay is calculated based on your last VAT Return or, if your business is new to VAT, is an estimated amount. If you pay monthly, payments are due at the end of months 4-12 and you must pay 10% of your estimated final VAT bill. If you pay quartely, payments are due at the end of months 4,7 and 10 and you must pay 25% of your final bill.

Under this scheme, your VAT Return is due two months after your year end. You must then make a ‘balancing payment’ – a final payment which settles the difference between the amount you paid in advance and the amount confirmed in your VAT Return.

If you paid too much, you should apply for a refund. Your instalments for the next tax year may be adjusted to more accurately reflect your turnover.

Pros and cons of the VAT Annual Accounting Scheme

Some of the main benefits of joining the Annual Accounting Scheme include:

  • Only having to fill in one VAT Return each year, rather than the usual 4.
  • A potentially smoother cash flow from paying in instalments (and having the option to make additional payments when you can afford to).
  • Having additional time to submit your annual VAT return and make the balancing payment.

However, as it is only possible to get refunded for overpaid VAT once a year, the scheme is unlikely to benefit businesses which regularly reclaim VAT.