Annual VAT accounting: reconcile instalments to the final return
A UK business on the VAT Annual Accounting Scheme ends its year with £25,200 of VAT due and £21,600 already paid in instalments. The person preparing the return enters £3,600 in box 5 because that is the amount left to pay. The cash figure is right, but it is in the wrong place. Box 5 reports the actual liability for the year, and the instalments only reduce the final payment.
How the scheme sets the payments
The scheme normally means one annual VAT return with either nine monthly or three quarterly interim payments. Monthly instalments are 10% each and quarterly instalments are 25% each. They are normally based on the previous annual VAT liability, or an estimate if the business has been registered for less than 12 months.
Monthly payments fall at the end of months 4 to 12 of the annual period. Quarterly payments fall at the end of months 4, 7 and 10. HMRC supplies the schedule.
Annual accounting changes return and payment frequency, not the underlying VAT treatment, and it can be combined with cash accounting. Entry generally requires expected taxable supplies of no more than £1.35m excluding VAT, and other exclusions apply. Fewer returns do not automatically improve cash flow, because a business that normally receives repayments may wait until year end for its refund.
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Three figures with different jobs
Complete every return box as normal and never deduct interim payments from box 5. The balancing payment is box 5 less the interim payments for that annual period. Overpayment can produce a refund, and the return must still be filed when no balance is payable.
This hypothetical covers a full 12-month period to 31 December 2026. The prior-year liability was £24,000, the monthly schedule did not change and all nine payments cleared, with no unrelated credits.
Entering £3,600 in box 5 would understate the liability by £21,600. The actual liability is 5% above the prior year, which keeps this example below the 10% increase in VAT payable that HMRC requires businesses to report.
| Figure | Amount | Use |
|---|---|---|
| Scheduled instalment | £2,400 | 10% of the £24,000 prior-year liability |
| Nine paid instalments | £21,600 | Reduce the final cash payment |
| Actual annual liability | £25,200 | Box 5 |
| Balancing payment | £3,600 | Cash still payable |
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Check the date and payment route
The annual return and balancing payment are normally due two months after the period ends, which would be 28 February 2027 here. Use the actual due date on the return. 28 February 2027 is a Sunday, so a transfer started that day is not automatically on time. Check HMRC's timing for the chosen payment method, including weekends, and arrange payment early enough to meet its deadline. A period shorter than four months has no interim payments and allows only one month for the return and balance.
Form VAT623 sets up Direct Debits for instalments but cannot be used for balancing payments. A balancing payment Direct Debit can be set up through the VAT online service.
When the schedule stops fitting
Tell HMRC immediately about significant expected or actual changes. These include VAT payable rising by 10% since the instalments were last calculated, or taxable supplies exceeding the £1.6m exit threshold. If the liability is falling, do not simply reduce the standing payment yourself.
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The year-end working
Keep one working that moves from the VAT records to the final payment. If instalments were paid and box 5 equals the balancing payment, stop and check the return. The instalments have probably been deducted from the wrong figure.
- Reconcile the annual VAT control account to the full box 5 figure.
- Tie each instalment to HMRC's schedule and the bank for the same annual period.
- Investigate missing or misallocated instalments before paying the balance.
- Check the actual period and due date, arrange the final payment separately and keep the payment evidence.