What is the annual accounting scheme for VAT?
Answered 11 March 2026
VAT Annual Accounting Scheme
HMRC Guidance / Practice
Overview & Purpose
The Annual Accounting Scheme is a voluntary simplification scheme, introduced on 1 July 1988, designed to ease the administrative burden on small businesses. It allows businesses to spread their VAT payments more evenly over the year, helping cash flow management, and reduces compliance costs by requiring only one VAT return per year instead of the usual four. Businesses also benefit from an extra month to submit the return and any balancing payment.
Eligibility
Businesses with an annual taxable turnover up to £1,350,000 (the value of all taxable supplies at standard, reduced, and zero rates) can join the scheme. Businesses not yet VAT-registered can register for VAT and apply for the scheme at the same time.
How It Works
- Businesses make monthly or quarterly interim payments based on an estimate of their annual VAT liability.
- For quarterly interim payments, the first payment is due at the end of the 4th month of the annual accounting period, then at the end of months 7 and 10, with a final balancing payment due with the VAT return.
- At the end of the year, the business submits a single VAT return two months after the year-end, along with any balancing payment.
- Interim payments must be made electronically — the scheme does not accept cash or cheque payments, and insisting on such methods will result in refusal of entry to the scheme.
VAT Return Periods
- HMRC cannot normally issue a VAT return for a period longer than 12 months.
- Where a business applies from its Effective Date of Registration, an annual period of up to 12 months and 30 days is possible.
- The system does not issue return periods shorter than 3 months, so some businesses may receive one or more short-period returns before their first 12-month return.
Leaving the Scheme
Once joined, a business may continue to use the scheme until its annual taxable turnover (including disposal of stock and capital assets, excluding VAT) reaches £1,600,000. At that point, it must leave the scheme at the end of its current tax period.
A business will also be removed from the scheme if:
- Debt from non-payment of interim amounts exceeds 20% of the expected annual liability;
- It receives four reminder letters relating to the last 6 interim payments (over two accounting periods); or
- It fails to submit two consecutive annual VAT returns and balancing payments.
Repayment Traders
If a business consistently reclaims more VAT than it pays ("repayment trader"), it can still join the scheme and will not need to make interim payments. However, it will not receive any repayment until it submits its VAT return at the end of the annual accounting year.
Compatible Schemes
The Annual Accounting Scheme can be used alongside:
- Flat Rate Scheme
- Cash Accounting Scheme
- Retail Schemes
- VAT Margin Schemes
- Capital Goods Scheme
- Tour Operators Margin Scheme (TOMS)
How to Apply
VAT-registered businesses apply using form VAT600AA. Further detail is available in VAT Notice 732 (Annual Accounting).
Citation sources
This allows the customer to submit one VAT return each year and pay interim instalments based on an estimated liability for the year. Customers then complete a VAT Return two months after the year-end with the balancing payment. Public Notice 732 - Annual Accounting is available to download.
You’re a ‘repayment trader’ if you consistently claim more VAT from us than you pay. You can still join the scheme and you will not need to make interim payments if you are in an annual repayment position. However, you will not receive any repayment due until you have submitted your VAT Return at the end of your annual accounting year. If you occasionally have repayment returns as well as payment returns, the scheme may not be suitable for you. Repayments can only be made based upon the VAT decl
Once you’ve joined the scheme, you may continue to use it until the annual value of your taxable supplies, including the disposal of stock and capital assets reaches £1.6 million. This excludes VAT. If you go over this figure, you’ll have to leave the scheme at the end of your current tax period and use the normal method of accounting in future. For example, you must leave the scheme on 30 November and begin paying normal VAT accounting from 1 December if your: VAT quarter ends on 30 November ta
If you use the Cash Accounting Scheme, you may also be able to use the Annual Accounting Scheme. This scheme allows you to even out your VAT payments as you pay monthly or quarterly instalments based on an estimate of your annual VAT liability. At the end of the year, you complete a single VAT Return and pay any balance due. For more information, read Annual accounting (VAT Notice 732).
Businesses that are registered for VAT and want to use the Annual Accounting Scheme can apply using the VAT600AA form. If you are not registered for VAT, you can register for VAT and apply for the Annual Accounting Scheme at the same time.
You can use the Annual Accounting Scheme with the Flat Rate Scheme, this can make a significant difference to the cost of complying with VAT rules. Section 9 contains more details about using the 2 schemes together. Other schemes that you may use with annual accounting are: Cash Accounting Scheme (VAT Notice 731) Retail Schemes (VAT Notice 727) VAT Margin Schemes Capital Goods Scheme (VAT Notice 706/2) Tour Operators Margin Scheme (VAT Notice 709/5)
Annual accounting is a voluntary simplification scheme, which was introduced on 1 July 1988. The purpose of the scheme is to ease the burden on small businesses. The scheme allows small businesses to spread their VAT payments more evenly over the year, making it easier to manage their cash flow. Businesses that use the scheme also benefit from a reduction in the costs of complying with their VAT obligations. They have to submit only one return each year, instead of the usual four, and get an ext
If the business is on quarterly interim payments, the first payment will become due at the end of the fourth month of the annual accounting period. The next payments will be due at the end of months seven and ten, with a final balancing payment being due with the VAT return.
Normally, we are unable to issue a VAT return for a period longer than 12 months. A business may receive a short period return when it joins the scheme if it requested a year end which would make the annual accounting year longer than 12 months. However, if a business is applying to use the annual accounting scheme from its Effective Date of Registration, then it is possible to have an annual period which is 12 months and 30 days (maximum). Any additional days will not be used when calculating t
Defaulting on an interim payment will not result in the issue of a default surcharge. Instead if a business fails to meet the requirements of the scheme, it will be removed from the Annual Accounting Scheme. Businesses will be removed from the scheme under the following circumstances: Payment failures; Debt created by non-payment of the interim amounts is greater than 20% of the expected annual liability (unaffected by other debts); If they have received four reminder letters in relation to the
The annual accounting system will not recognise cash or cheque payments. Any monies received by this method will be appropriated to any outstanding debts, or held as a non-appropriated amount. This would result in the business incurring payment defaults and ultimately being removed from the scheme. The annual accounting scheme was introduced to simplify VAT accounting for small businesses and to limit the amount of manual intervention in the scheme. If an applicant insists on making interim paym