Taxation (UK) · The effect of special schemes

Annual Accounting Scheme for VAT in ACCA TX-UK

Updated 11 October 2026 · Fact-checked

The annual accounting scheme lets a VAT-registered business file one VAT return a year instead of four. It pays VAT by interim instalments, usually nine monthly payments of 10% of last year's liability, then a balancing payment. The return and balancing payment are due within two months of the year end.

Understand Annual Accounting Scheme for VAT

Normally a VAT-registered business files a return and pays VAT every quarter. The annual accounting scheme is an optional scheme that cuts this to one return a year. It saves admin time and helps with planning, because the payments are known in advance.

The business pays VAT during the year by interim payments. These are based on last year's VAT liability, not on this year's actual figures. At the end of the year you work out the real VAT for the year. You then pay or reclaim the difference through the balancing payment.

There are two ways to pay interims. You can make nine monthly payments, each 10% of the previous year's liability, in months 4 to 12 of the year. Or you can make three quarterly payments, each 25% of the previous year's liability, in months 4, 7 and 10. Payments are due by the end of the month. A business with no history of VAT uses an estimate of its liability.

To join, the business must expect its taxable turnover (excluding VAT) in the next 12 months to be no more than £1,350,000. It must also be up to date with its VAT returns. Once in, it can stay until its taxable turnover exceeds £1,600,000, and then it must leave. These limits are not in the tax tables ACCA gives you, so learn them.

The annual return and the balancing payment are due within two months of the end of the annual accounting period. That is a longer wait than the normal one month and seven days for a quarterly return. Think about who gains: a business with steady or falling VAT gains cash flow and simplicity. One with rising VAT pays interims that are too low and faces a big balancing payment.

Key rules to remember

Entry limit: Expected taxable turnover (excluding VAT) for next 12 months ≤ £1,350,000; Business must also be up to date with its VAT returns. Learn this limit, as it is not in the tax tables.
Leaving limit: Must leave when taxable turnover > £1,600,000; Applies to turnover in the annual accounting period. Learn this limit as well.
Monthly interim payments: 9 × (10% × previous year's VAT liability), paid in months 4 to 12; Normally paid by direct debit, by the end of each month.
Quarterly interim payments: 3 × (25% × previous year's VAT liability), paid in months 4, 7 and 10; Alternative to monthly payments. The total is 75% of last year's liability.
Balancing payment: Actual VAT liability for the year − interim payments made; A negative answer means a repayment is due to the business.
Deadline: Annual return and balancing payment due within 2 months of the end of the annual accounting period; Example: year end 31 March, due 31 May.
VAT rate: Standard rate 20%; From the tables ACCA provides. Registration limit is £90,000 and deregistration limit is £88,000.

How to solve Annual Accounting Scheme for VAT questions

Use this order for any question on the annual accounting scheme. Read the scenario for the dates and the previous year's VAT figure first.

1Check eligibility. Compare the expected taxable turnover (excluding VAT) with £1,350,000. Check the business is up to date with its VAT returns.
2Identify the base figure. Find the previous year's VAT liability. This is the figure the interims are based on, not the current year's.
3Choose the payment pattern. Use nine payments of 10% (months 4 to 12) or three payments of 25% (months 4, 7 and 10), as the question states.
4Calculate each interim payment and the total paid in the year.
5Work out the actual VAT liability for the year: output tax less recoverable input tax.
6Calculate the balancing payment: actual liability less total interims. Say whether it is a payment or a repayment.
7Give the deadline: two months after the year end for the return and the balancing payment.
8If asked for advice, state the benefits and drawbacks and apply them to the facts, such as growing or falling turnover.

Quickest way: Ten percent, nine times, then the difference

When to use it: Use this for calculation questions where you are given last year's VAT liability and this year's actual liability.

Take last year's VAT liability. Multiply by 90% to get the total of nine monthly interims (or by 75% for three quarterly ones).
Subtract that total from this year's actual liability.
Write the answer as a balancing payment (positive) or repayment (negative).
Add 2 months to the year end for the deadline.
For eligibility, compare expected turnover to £1,350,000 and, for leaving, to £1,600,000.

Common mistakes in Annual Accounting Scheme for VAT

Basing the interim payments on the current year's VAT liability.
Students assume the payments are an advance on this year's tax.
Fix: Always use the previous year's liability. The current year's figure only appears in the balancing payment.
Paying 10% for twelve months, or putting the payments in months 1 to 9.
Students remember '10%' but not the timing.
Fix: Nine payments, in months 4 to 12. The first three months have no payment. Quarterly payments fall in months 4, 7 and 10.
Mixing up the entry limit and the exit limit.
Both limits sound alike and are not in the tax tables.
Fix: Join if expected taxable turnover is no more than £1,350,000. Leave if it exceeds £1,600,000. Write both numbers on your rough paper.
Using the VAT registration limit of £90,000 as the scheme's limit.
The tables give £90,000 and £88,000, which are close to hand.
Fix: The £90,000 and £88,000 limits are for registering and deregistering. The scheme limits are separate.
Giving the deadline as one month and seven days after the year end.
That is the normal rule for quarterly returns.
Fix: Under the scheme, the return and balancing payment are due within two months of the end of the annual accounting period.
Forgetting that the balancing payment can be negative.
Students assume a payment is always due.
Fix: If the interims exceed the actual liability, the business is owed a repayment. Show the sign clearly.

Worked examples

Example 1

Kestrel Ltd is in the annual accounting scheme. Its VAT liability for the previous year was £48,000. Its actual VAT liability for the year ended 31 March 2027 is £52,000. Kestrel pays nine monthly interims. Calculate each interim payment, the total interims and the balancing payment, and state the due date of the balancing payment.

Show the solution

Each interim is 10% × £48,000 = £4,800.
Nine interims: 9 × £4,800 = £43,200 (paid in months 4 to 12 of the year).
Balancing payment: £52,000 − £43,200 = £8,800.
The return and the balancing payment are due within two months of the year end: 31 May 2027.

Answer: Each interim is £4,800, total interims £43,200. The balancing payment is £8,800, due by 31 May 2027.

Example 2

Ravi has run a VAT-registered shop for three years. His expected taxable turnover for the next year is £1,200,000 and his returns are up to date. His VAT liability for the previous year was £30,000. He joins the scheme for the year ending 30 June 2027, paying nine monthly interims. His actual VAT liability for that year is £24,000. Explain whether he can join, calculate the interims and balancing figure, and state the deadline.

Show the solution

Eligibility: expected taxable turnover of £1,200,000 is no more than £1,350,000, and his returns are up to date. He can join.
Each interim is 10% × £30,000 = £3,000.
Nine interims: 9 × £3,000 = £27,000. The year starts on 1 July 2026, so they run from month 4 (October 2026) to month 12 (June 2027).
Balancing figure: £24,000 − £27,000 = −£3,000. He has overpaid.
So a repayment of £3,000 is due to Ravi. The return is due within two months of 30 June 2027, which is 31 August 2027.

Answer: Ravi can join. Interims are £3,000 a month, £27,000 in total. The year's liability is £24,000, so he is owed a £3,000 repayment. The return is due by 31 August 2027.

Exam tips

Write the limits £1,350,000 and £1,600,000 at the start of your answer sheet. They are not in the tax tables, and OT questions on eligibility test them directly.
In an OT case, read which payment pattern is stated before calculating. Nine at 10% and three at 25% give different totals.
In written questions, show the sum of interims separately from the balancing payment. Method marks go to clear workings.
For advice questions, give one benefit and one drawback tied to the facts. Falling VAT helps cash flow. Rising VAT means a large balancing payment.
State the deadline as two months after the year end and give a calendar date if the year end is given.

Practice questions from The effect of special schemes

Annual Accounting Scheme for VAT: frequently asked questions

How are annual accounting scheme interim payments calculated?

Use the previous year's VAT liability. For monthly payments, pay 10% of it in each of months 4 to 12, nine payments in all. For quarterly payments, pay 25% in months 4, 7 and 10.

How do I calculate the balancing payment under the annual accounting scheme?

Work out the actual VAT liability for the whole year, then deduct the total interims paid. A positive result is the balancing payment. A negative result is a repayment due from HMRC.

What are the advantages and disadvantages of the annual accounting scheme?

Advantages: one return a year, less admin, known payments and extra time to file and settle. Disadvantages: if VAT is rising, the balancing payment can be large. Interims also continue even if the real liability falls, although the balancing payment then corrects it.

What is the annual return deadline under the scheme?

The annual return and the balancing payment are due within two months of the end of the annual accounting period. If the year ends on 31 December, the deadline is 28 or 29 February.