What happens to businesses under the annual accounting scheme if their turnover decreases?

When a business is under the annual accounting scheme, it makes interim VAT payments based on estimated turnover throughout the year. If the turnover decreases significantly, these interim payments may still be based on previous estimates that do not accurately reflect the reduced sales. As a result, businesses might find themselves in a position where they have overpaid VAT during the year.

Since the interim payments are calculated in advance, a decrease in actual turnover does not immediately adjust the amount paid; hence, the business could end up contributing more to HMRC than necessary, leading to overpayments. At the end of the year, during the annual VAT return, the business can reconcile these payments against the actual VAT liability, potentially receiving a refund if their actual sales were indeed lower.

This mechanism highlights the importance of keeping accurate forecasting and records, as continuous monitoring can mitigate the risks associated with overpaying due to outdated estimates.