VAT Annual Accounting Scheme (UK)

Who can join, and when you have to leave

GOV.UK’s eligibility test has two parts: you’re a VAT-registered business, and “your estimated VAT taxable turnover is £1.35 million or less in the next 12 months.” Notice 732 section 2.2 explains what goes into that figure: the £1,350,000 test “excludes VAT” and covers standard, reduced and zero rate supplies, but not exempt supplies or sales of your capital assets. A business that isn’t registered yet can register and apply for the scheme at the same time.

Notice 732 section 2.6 lists who can’t join: businesses registered as part of a VAT group or division, anyone who stopped using annual accounting in the previous 12 months, insolvent businesses, and a business with “a VAT debt that is getting bigger” (a small debt with an agreed repayment plan may be allowed).

Leaving uses a higher line. Section 2.4 says you can stay in the scheme “until the value of your taxable supplies goes over £1,600,000 per year,” and that unless you go over it significantly, “you’ll usually be withdrawn from the scheme at the end of the annual accounting year” in which that happens. If you realise during the year that turnover has gone or will go over £1,600,000, section 2.5 says you “must notify us immediately.” You can also leave voluntarily by writing to HMRC, but either way GOV.UK says you have to wait 12 months before you can rejoin.

How the instalments and the balancing payment work

Notice 732 section 4.1 sets the normal pattern: “9 instalments of 10% of your last year’s annual VAT liability.” They fall due at the end of months 4 through 12 of the annual accounting period. If you ask for it on the application, section 4.2 allows 3 quarterly instalments instead, each 25 percent of last year’s liability, “due in months 4, 7 and 10.” HMRC writes to you with the amounts and dates, and section 4.8 lets you make extra voluntary payments at any time.

If the period is shorter than 4 months, which can happen in the first year if you pick a year end to match your financial year, section 3.4 says HMRC “will not ask you to make interim payments,” and you get only one month to file and pay.

The annual return is filled in exactly as a normal return. Section 6.1 is specific: “Do not deduct any interim payments you’ve made during the year when calculating the figure to put in box 5.” The balancing payment, per section 6.2, “should be the box 5 figure minus the interim payments you have made.” HMRC’s own example: 9 instalments of £3,000, an actual liability of £32,000 in box 5, and a balancing payment of £5,000. If the instalments come to more than box 5, HMRC refunds the difference once it receives the return.

Timing is the main cost of the scheme. Instalments “do not qualify for any extension to due dates as with normal returns,” in section 1.4’s words, because the annual return already gets 2 months instead of one. And a business that regularly reclaims VAT waits a year for its money: GOV.UK warns that “you’ll only be able to get 1 refund a year.”

Why a growing Stripe business has to watch its instalments

Instalments look backward. A subscription business whose Stripe revenue is climbing is paying this year’s VAT on last year’s numbers, so the balancing payment at the end is where the growth lands.

HMRC doesn’t leave that entirely to you. Notice 732 section 4.7 says you must contact the Annual Accounting Registration Unit “immediately” if you realise your VAT payable “will, or has increased by 10% since the last time you calculated your instalments,” or that taxable supplies will go over £1,600,000. HMRC then amends the instalments, or may take you off the scheme. The Notice’s example: a £30,000 liability sets monthly instalments of £3,000; when the business realises this year’s liability will be nearer £40,000, the instalments are raised to £4,000.

A 10 percent rise in VAT payable is not a high bar for a business that is growing. Comparing year-to-date output VAT from Stripe against the run rate the instalments imply, every quarter, is the simplest way to see it coming.

The opposite case matters too. A UK software business that sells mostly to overseas business customers may collect little UK VAT while still paying VAT on its own costs. Notice 732 section 7.1 says a “repayment trader” can join and won’t make interim payments, but “will not receive any repayment due until you have submitted your VAT Return at the end of your annual accounting year.” For that business the scheme usually means waiting longer for money it is owed.

Getting a year of Stripe tax data to match one return

Stripe doesn’t produce a UK return. Its tax documentation says it “provides location reports for the US and Canada,” so for UK VAT the source is the Stripe Tax exports. The summarized export aggregates tax per jurisdiction, and Stripe recommends it “for country-level filings.” The itemized export breaks each transaction down by line item. Every summarized row records the start and end of the date range it covers, so check that the range matches your annual accounting period, which often doesn’t run January to December.

Three things make the annual figure drift from the sum of your monthly checks. First, Stripe says it considers transactions “effective on the date they finalize” and doesn’t recalculate tax afterwards, so a subscription invoice finalized on the last day of the period belongs to that year even if it is paid in the next one. Second, refunds and credit notes reduce the tax in the period they are recorded, not the period of the original sale. Third, if you sell in currencies other than sterling, Stripe converts tax to the filing currency “using available exchange rates at the time of the transaction,” and the exports show amounts in both currencies, so use the filing-currency columns rather than converting a year of totals yourself.

If you also use the Cash Accounting Scheme, the date that matters is when the customer paid, not when Stripe finalized the invoice, so the Stripe Tax export is a starting point rather than the return figure.

The Annual Accounting Scheme in your QuickBooks books

The scheme doesn’t change how sales and purchases are recorded. Output VAT still builds up in the VAT liability account as Stripe sales are recorded, and input VAT on purchases still reduces it. What changes is the payment side.

Each instalment is a payment towards a liability that hasn’t been finalised yet. Record it against the VAT liability account (a VAT control account, in UK terms), not as an expense and not as a separate prepayment you forget about. In the middle of the year the account then shows the VAT built up from sales and purchases so far, less the instalments paid. That balance is a useful check: if it is growing fast, the balancing payment will be large, and section 4.7 may already require you to tell HMRC.

At the year end the account should hold one number: the box 5 figure for the year less the instalments, which is exactly the balancing payment or the refund. With the Notice’s figures, £32,000 of VAT built up over the year less £27,000 of instalments leaves £5,000. When the account doesn’t net to the balancing payment, the usual causes are an instalment posted to the wrong account, a Stripe sale or refund dated into the wrong annual period, or VAT that went into the liability account at a rate different from what Stripe Tax charged.

If you use the Flat Rate Scheme as well, Notice 732 section 9.2 says you follow the flat rate rules for the return figures, just once a year instead of four times. The flat rate surplus then builds up for a whole year in the liability account before the return shows how much of it is income.