The VAT Cash Accounting Scheme lets eligible businesses account for output VAT when customers pay and reclaim input VAT when suppliers are paid. It can improve cash flow where customers pay slowly, but it delays input-tax recovery on unpaid purchases.
Who can join?
A VAT-registered business can normally join where estimated VAT-taxable turnover for the next 12 months is £1.35 million or less. It must also be up to date with VAT returns and payments, and not have committed certain VAT offences or received a penalty for VAT evasion in the previous year.
The threshold excludes VAT and normally focuses on taxable supplies, including zero-rated sales. Exempt and outside-the-scope income are treated under the detailed rules.
When must a business leave?
You normally leave if annual VAT-taxable turnover exceeds £1.6 million or the business is no longer eligible. There is a tolerance where the excess is temporary and HMRC agrees continued use. Account for outstanding debtors and creditors under the exit rules.
How it changes VAT timing
| Transaction | Normal VAT accounting | Cash Accounting |
|---|---|---|
| Customer invoice | Output VAT usually due by tax point | Output VAT due when payment is received |
| Supplier invoice | Input VAT normally claimable with valid evidence | Input VAT claimable when supplier is paid |
| Part payment | Based on invoice tax point | VAT accounted for proportionally |
Worked example
A business issues a £12,000 invoice including £2,000 VAT in March and receives £6,000 in May and £6,000 in July. Under cash accounting, £1,000 output VAT is accounted for with each payment rather than all £2,000 at the original tax point.
How to join
There is normally no separate application. An eligible business begins using the scheme from the start of a VAT period and applies it consistently. Record the start date and ensure the opening treatment prevents invoices being taxed or claimed twice.
Transactions outside the scheme
Cash accounting does not apply to every transaction. Exceptions can include:
- goods bought or sold under lease purchase, hire purchase or similar terms;
- certain credit-sale agreements;
- imports, acquisitions and reverse-charge transactions;
- goods invoiced in advance of export in specified circumstances;
- transactions under another scheme with its own rules.
Check VAT Notice 731 for the current exclusions.
Bad debts
Because output VAT is not normally paid until the customer pays, separate bad-debt relief is usually unnecessary for cash-accounted sales. Conversely, input VAT is not claimed until the supplier is paid. Debts from periods before joining or after leaving need transitional treatment.
Part payments and netting
Allocate receipts to invoices and split VAT proportionally. Contra arrangements, credit notes, card fees and amounts withheld by platforms can complicate the date and amount treated as paid. Maintain a clear audit trail from bank receipt to invoice.
Cash Accounting and Flat Rate Scheme
A business can use the Flat Rate Scheme’s cash-based turnover method where eligible, but this is not identical to VAT Cash Accounting. Flat Rate users normally have restricted input-tax recovery. Confirm the interaction rather than applying both sets of calculations mechanically.
Advantages
- reduces the risk of financing VAT on unpaid customer invoices;
- naturally provides relief where a customer never pays;
- can align VAT liabilities with bank cash flow;
- may suit credit-based service businesses.
Disadvantages
- input VAT waits until suppliers are paid;
- more detailed payment allocation can be required;
- businesses paid immediately may gain little;
- exit adjustments can create a catch-up liability;
- refund businesses can be worse off.
Records and MTD
Keep digital records of invoice values, VAT, payment dates, part payments, credits and scheme start or exit adjustments. Making Tax Digital for VAT still applies; the scheme changes timing, not the digital-record obligation.
Should you use it?
Compare debtor days with supplier payment terms and model at least several VAT periods. A business that receives cash quickly but pays suppliers slowly can lose cash-flow benefit. Review eligibility before projected turnover reaches the exit threshold.
Official guidance
This guide is general information. Scheme eligibility and transaction exclusions need fact-specific review.
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