VAT Payments on Account (UK)

When payments on account start, and how you leave

You don’t opt in. GOV.UK says HMRC “will tell you” to make payments on account once you go over £2.3 million, and that it will “write to you with a payment schedule” giving the amounts and every deadline. The same schedule is in your VAT online account. The payments on account cycle starts “in the first quarter after you go over the £2.3 million threshold.”

The threshold counts VAT owed, not sales. A business that collects a lot of UK VAT through Stripe but also reclaims a lot of input VAT is measured on the net figure. GOV.UK adds that the threshold includes VAT on imports and on moving goods into and out of excise warehouses. Each registered division is assessed as a separate business, and a VAT group is assessed as a whole, with the representative member making the payments and every member jointly and severally responsible if they aren’t made.

Leaving is slower than arriving. If your liability falls below £2.3 million in your reference year, HMRC removes you from the arrangement 6 months later, and you keep paying until then. GOV.UK’s example: with a reference year ending in September and liability below the threshold at that point, the last payment on account is in March of the following year. You won’t be removed if your liability for the last 12 months, ending in a later quarter, goes over £2.3 million again. And if your liability in any completed year after the reference year is below £1.8 million, you can write to the payments on account team to ask to be removed.

How the amounts are set and when they are due

HMRC starts from your annual VAT liability in the period you went over the threshold and divides it by 24. Two payments a quarter at that amount add up to one twelfth of the year’s VAT, about one average month, so the balancing payment usually carries most of the quarter. If you have been in business for less than 12 months, HMRC works the payments out as a proportion.

After the first period, the amounts follow an annual cycle that begins in April, May or June depending on your VAT return stagger, and are based on your liability in a “reference year.” For stagger 1 (quarters ending March, June, September and December) the reference year ends in September and the cycle begins the following April. Stagger 2 uses a year ending October with a May start, and stagger 3 a year ending November with a June start. HMRC also reviews your last 12 months of liability every quarter and increases the payments if liability has gone up by 20 percent or more. If your liability falls below 80 percent of the figure used, you can write to ask for lower payments, either for a completed year or for the current year with an estimate of the returns still to come. GOV.UK is firm that you must not change the amounts yourself until HMRC tells you in writing or the schedule in your VAT online account changes.

The due dates are “the last working day of the second and third months of every VAT quarter, no matter what your period end date is.” Cleared funds must be in HMRC’s account by then. If the deadline falls on a weekend or bank holiday, the payment must clear on the last working day before it, unless you pay by Faster Payments. The 7-day extension that normally comes with paying electronically does not apply to payments on account.

The balancing payment is due with the return. With standard period end dates it must have cleared “by the last day of the month,” and with agreed non-standard period ends, by the due date for those returns. If the return is a repayment return, HMRC repays the payments on account you made in that quarter.

A worked example

A business on stagger 1 goes over the threshold with an annual VAT liability of £3,600,000. HMRC divides that by 24, so each payment on account is £150,000.

For the quarter from January to March, the business pays £150,000 by the last working day of February and another £150,000 by the last working day of March: £300,000 in total.

The quarter’s return shows net VAT of £930,000. GOV.UK says not to adjust any figures on the return for payments already made, so the return still shows £930,000. The balancing payment is £930,000 minus £300,000, which is £630,000, paid with the return.

If the return had shown a repayment instead, HMRC would repay the £300,000 of payments on account made in the quarter.

Paying the actual monthly liability instead

GOV.UK offers two alternatives. The first is monthly returns, which you apply for by changing your registration details online. You might have to stay on monthly returns for at least one year, and you keep making payments on account until the request is approved and your first monthly return is due. Monthly filers who pay electronically may get up to 7 extra days. If you later go back to quarterly returns, that extension stops and payments on account start again from the first quarterly period.

The second is to pay the actual liability for the previous month without filing a monthly return. GOV.UK’s example: “the payment due at the end of February will be the actual liability for January.” It suits a business whose turnover moves around during the year, such as one with seasonal Stripe sales, because the payments follow what you actually owe rather than an average of last year. You must use it for at least one year, and you ask for it by contacting the payments on account team.

There are limits. A month in credit doesn’t produce an immediate repayment, the credit can’t be netted against the next month’s payment, and it is carried to the quarterly return instead. GOV.UK suggests monthly returns if you are often in credit. And HMRC can withdraw the option if it isn’t satisfied your monthly payments are accurate, directing you to monthly returns or back to the amounts it set. You can ask for a review in writing or appeal to the tax tribunal within 30 days of the letter telling you the decision.

Payment methods, the return and late payment

GOV.UK says you must pay “all your payments” by one of these methods: approving a payment through your online bank account, online or telephone banking, CHAPS or Bacs, debit or corporate credit card online, at your bank or building society, or standing order. Direct Debit is not on that list, so check how you pay before the first deadline.

The return itself is unchanged. You file it online as normal, through the same Making Tax Digital software you use for any other return, and the payments on account don’t appear on it. Box by box, the return reports the quarter’s VAT in full, and the deduction for payments already made happens only in the amount you pay.

Payments on account not paid on time are subject to late payment interest. If the payments on account or the balancing payment are not paid in full and on time, GOV.UK says HMRC will take immediate action to recover the debt, charge late payment interest, consider late payment penalties on amounts unpaid after the balancing payment due date, and consider moving you from quarterly to monthly returns.

Payments on account in your QuickBooks books

Sales and purchases are recorded exactly as before. UK VAT collected on Stripe sales builds up as output VAT in the VAT liability account (the VAT control account, in UK terms), and input VAT on purchases reduces it. That account is the liability the payments on account are paid towards.

Record each payment on account as a payment against that same VAT liability account, not as an expense and not as a separate prepayment. In the middle of a quarter the account then shows the VAT built up so far, less the payments already made. Because the payments are fixed and your VAT is not, that balance is also an early sign of a large balancing payment, or of liability that has moved by 20 percent or more.

At the quarter end the account should hold one figure for the quarter: the net VAT on the return less the two payments on account, which is exactly the balancing payment. With the worked example, £930,000 of VAT built up in the quarter less £300,000 of payments on account leaves £630,000. When the account doesn’t net to the balancing payment, the usual causes are a payment on account posted to the wrong account or the wrong quarter, a Stripe sale or refund dated into the wrong period, or VAT recorded in QuickBooks at a different rate from the one Stripe Tax charged. If you pay the actual monthly liability instead, the same check works: the quarter’s net VAT less the two monthly payments should equal what you pay with the return.