The VAT Cash Accounting Scheme changes when you pay and reclaim VAT. You pay VAT to HMRC only when your customer pays you, and you reclaim VAT only when you pay your supplier. It can help cash flow, especially if customers are slow to pay.
How it differs from standard VAT
On the standard method, the date on the invoice decides when VAT is due. You can owe HMRC VAT on a sale before the customer has paid you.
On cash accounting, the payment date decides. You pay VAT once the money arrives, and you reclaim VAT once you have paid out.
| Point | Standard method | Cash accounting |
|---|---|---|
| VAT on sales due | When you invoice | When the customer pays |
| VAT on purchases reclaimed | When you are invoiced | When you pay the supplier |
The main benefit
The scheme helps cash flow. You do not hand VAT to HMRC on money you have not yet received. If a customer never pays, you do not pay VAT on that sale at all, so there is no need to claim bad debt relief later.
[ Infographic: Cash accounting vs standard VAT ]
Brief: two timelines, one triggered by the invoice date, the other by the payment date, showing when VAT is due.
Alt text: Cash accounting pays VAT when the customer pays, standard VAT pays when you invoice.
Caption: Cash accounting ties VAT to payment, not to the invoice.
Who can join
You can join if your estimated VAT taxable turnover is £1.35 million or less in the next 12 months. You do not need to apply. You can start at the beginning of a VAT period as long as you qualify.
You must leave the scheme once your turnover goes over £1.6 million.
When it may not suit you
Cash accounting is less useful if you usually reclaim more VAT than you pay, for example if you buy a lot on credit. In that case the standard method may let you reclaim sooner. It also does not fit well if most of your customers pay straight away, since there is little timing gain.
Frequently asked questions
How does the Cash Accounting Scheme work? You pay VAT when your customer pays you and reclaim VAT when you pay your supplier, rather than using the invoice date.
Who can use cash accounting for VAT? Businesses with estimated VAT taxable turnover of £1.35 million or less over the next 12 months.
When do I have to leave the scheme? Once your turnover goes over £1.6 million.
Does cash accounting help with bad debts? Yes. If a customer never pays, you never owe VAT on that sale, so you do not need bad debt relief.
Do I need to apply to join? No. You can start at the beginning of a VAT period if you meet the turnover limit.