How many VAT Returns do I submit on the Annual Accounting Scheme?

Just one per year. The four quarterly returns are replaced by a single annual return covering the whole VAT accounting year.

How are the advance payments calculated?

They are based on your last VAT Return (or HMRC's estimate if you are new to VAT). Either 9 monthly instalments of 10% of the estimated annual bill, or 3 quarterly instalments of 25% — 75–90% of the bill is paid in advance.

What happens if I overpay during the year?

If your advance payments exceed the actual bill on your annual return, you can claim a refund from HMRC. But there is only one refund per year, so the scheme does not suit businesses that regularly reclaim VAT.

Can my business join the scheme?

If your estimated VAT taxable turnover in the next 12 months is £1.35 million or less and you meet HMRC's other conditions (up to date with VAT, not insolvent, not in a VAT group or division), you can join.

When do I have to leave the scheme?

You must leave if you are no longer eligible or your VAT taxable turnover is (or is likely to be) more than £1.6 million at the end of the annual accounting year. You can also leave voluntarily at any time by writing to HMRC, but must wait 12 months to rejoin.

Is the scheme better than standard quarterly returns?

It depends. It suits businesses with stable VAT bills that want less paperwork and predictable payments. It is less attractive for businesses that regularly reclaim VAT, or whose turnover moves sharply up or down during the year.

VAT Annual Accounting Scheme Explained: UK Guide

The VAT Annual Accounting Scheme is an HMRC scheme that lets eligible UK businesses submit just one VAT Return a year instead of four quarterly returns. In exchange, businesses make advance payments towards their VAT bill during the year, based on their last return (or HMRC's estimate if they are new to VAT).

For businesses that find quarterly VAT returns disruptive or costly, the scheme can mean less paperwork and a more predictable payment schedule. However, it also changes how and when VAT is paid, so it does not suit every business — particularly those that regularly reclaim VAT.

This guide explains how the scheme works in 2026/27, who can join, how the payments are calculated, and the pros and cons of using it.

2026/27 context: the standard UK VAT rate is 20%, with 5% and 0% rates for specific supplies, and the VAT registration threshold is £90,000 of taxable turnover.

What is the VAT Annual Accounting Scheme?

Under normal VAT rules, a business submits a VAT Return every quarter and pays any VAT due on each return. The Annual Accounting Scheme replaces those four returns with a single return covering the whole VAT accounting year.

The scheme works as follows:

Advance payments: The business pays instalments towards its expected VAT bill during the year. HMRC writes to say when each instalment is due and how much it will be.
One annual return: The business submits a single VAT Return for the whole year.
Balancing payment or refund: On the return, the business compares what it paid in advance with the actual VAT bill. If it underpaid, it makes a final "balancing payment". If it overpaid, it can claim a refund from HMRC.

The advance payments are based on the business's last VAT Return. If the business is new to VAT, HMRC will estimate the bill instead.

How do the advance payments work?

There are two payment options under the scheme. The business chooses one:

Option 1: Nine monthly instalments

The business makes 9 monthly payments, due at the end of months 4, 5, 6, 7, 8, 9, 10, 11 and 12 of its VAT accounting year.

Each instalment is 10% of the estimated annual VAT bill.

So over the year the business pays 90% of the estimated bill in advance, and the remaining 10% (or any difference) is settled as the balancing payment with the annual return.

Option 2: Three quarterly instalments

The business makes 3 quarterly payments, due at the end of months 4, 7 and 10 of its VAT accounting year.

Each instalment is 25% of the estimated annual VAT bill.

Under this option the business pays 75% of the estimated bill in advance, and the rest is settled as the balancing payment.

In both cases, HMRC writes to the business confirming the due dates and the instalment amounts, so there is no guesswork about what to pay and when.

When is the VAT Return and balancing payment due?

The annual VAT Return — and any balancing payment — is due within 2 months of the end of the VAT accounting period.

For example, if the accounting year runs from 1 April 2026 to 31 March 2027, the return and balancing payment must be submitted and paid by 31 May 2027.

There is one exception: if the accounting period is under 4 months long, the business makes no advance payments, and the final payment is due within 1 month of the end of the period.

Worked example 1: monthly instalments and a balancing payment

A business has an estimated annual VAT bill of £20,000 based on its last return. It chooses the monthly instalment option.

The advance payment calculation is:

£20,000 × 10% = £2,000 per instalment

The business pays 9 instalments of £2,000:

£2,000 × 9 = £18,000 paid in advance

When the business submits its annual VAT Return, the actual VAT bill for the year turns out to be £21,400.

The balancing payment calculation is:

£21,400 − £18,000 = £3,400

The business pays HMRC a £3,400 balancing payment with its annual return, by the deadline two months after the year end.

Worked example 2: quarterly instalments and a refund

A business has an estimated annual VAT bill of £30,000 and chooses the quarterly instalment option.

The instalment calculation is:

£30,000 × 25% = £7,500 per instalment

The business pays 3 instalments of £7,500:

£7,500 × 3 = £22,500 paid in advance

At the year end, the actual VAT bill on the annual return comes to £21,000.

The refund calculation is:

£22,500 − £21,000 = £1,500

HMRC owes the business £1,500, which it can claim back as a refund.

Note that only one refund is available per year under the scheme. Businesses that regularly reclaim VAT — for example exporters or businesses with large zero-rated sales — may find this a poor fit, because they would wait a full year for each refund.

Who can join the VAT Annual Accounting Scheme?

A business can join the scheme if it expects its VAT taxable turnover in the next 12 months to be £1.35 million or less.

VAT taxable turnover means everything the business sells that is not VAT exempt — it includes standard-rated, reduced-rated and zero-rated sales, but not exempt supplies.

For example, a business with taxable turnover of £1.1 million can join, because £1.1 million is below the £1.35 million limit. A business expecting £1.4 million of taxable turnover cannot join.

Who cannot use the scheme?

Even if a business is under the turnover limit, it cannot use the scheme if:

It left the scheme in the last 12 months.
The business is part of a VAT-registered division or group.
It is not up to date with VAT returns or payments.
The business is insolvent.

These conditions are assessed at the time of joining, so a business with outstanding VAT returns or payments must sort those out first.

When must a business leave the scheme?

A business must leave the scheme if:

It is no longer eligible (for example, it becomes part of a VAT group or falls behind with VAT), or
Its VAT taxable turnover is — or is likely to be — more than £1.6 million at the end of the annual accounting year.

For example, a business that ends the year with taxable turnover of £1.7 million must leave, because £1.7 million is above the £1.6 million limit. A business at £1.5 million stays in, as long as it remains eligible otherwise.

A business can also leave voluntarily at any time by writing to HMRC. After leaving, it must wait 12 months before rejoining.

How do you join the scheme?

The joining process depends on whether the business is already VAT-registered:

Already VAT-registered: Apply online through HMRC's services or by post.
Registering for VAT now: Join the scheme at the same time as registering.

Businesses that are about to hit the registration threshold should first check the rules at When to Register for VAT UK — the £90,000 registration threshold explained.

Making Tax Digital and paying VAT

The Annual Accounting Scheme does not remove a business from Making Tax Digital (MTD) requirements. Businesses must:

Keep digital VAT records.
Submit their annual return using MTD-compatible software.
Pay VAT electronically — for example by Direct Debit or bank transfer.

Advantages of the Annual Accounting Scheme

The main benefits are:

Less paperwork: One VAT Return a year instead of four.
Predictable payments: Regular instalments make cash flow planning easier, because VAT bills are spread through the year rather than arriving in quarterly lumps.
Longer deadline: Up to two months after the year end to submit the return and pay any balancing amount.

For businesses with steady, predictable VAT bills, the scheme can simplify life considerably.

Disadvantages of the Annual Accounting Scheme

There are trade-offs to consider:

Only one refund a year: Businesses that regularly reclaim VAT — such as those with significant zero-rated sales — may wait up to a year to get VAT back.
Payments based on estimates: Advance payments are calculated from the last return, so a business with falling turnover may overpay during the year (and wait for a refund), while a business with rising turnover faces a large balancing payment at year end.
Less flexibility: Switching back to quarterly returns is not instant if circumstances change, and a business that leaves must wait 12 months to rejoin.
Not combinable with every setup: It cannot be used by businesses in VAT groups or divisions.

Annual Accounting vs Cash Accounting

The two schemes solve different problems:

Annual Accounting reduces the number of VAT returns (4 → 1) and spreads payments across the year.
Cash Accounting changes when VAT is reported, so VAT is paid when customers pay rather than when invoices are issued.

Learn how the other scheme works at VAT Cash Accounting Scheme Explained — it suits businesses that wait a long time for customer payments. Businesses considering the Flat Rate Scheme instead should read Flat Rate VAT and the VAT Flat Rate Scheme Percentages 2026.

Use the VAT calculator on the homepage to work out VAT on any amount before estimating your annual bill.

VAT Annual Accounting Scheme Explained