Who Can Use VAT Cash Accounting? UK Eligibility 2026

A VAT-registered business can normally use the Cash Accounting Scheme if expected VAT-taxable turnover for the next 12 months is £1.35 million or less. It must also meet HMRC’s compliance conditions and leave when turnover exceeds the applicable £1.6 million exit threshold.

What turnover counts?

Use forecast taxable turnover excluding VAT. Include standard-, reduced- and zero-rated supplies. Exempt and outside-the-scope income are generally excluded from this scheme test, but document the classification.

The test looks forward 12 months. Do not rely only on the last accounts if confirmed contracts or growth will take turnover above £1.35 million.

Other entry conditions

A business cannot normally join if:

• VAT returns or payments are materially overdue;
• it has been convicted of a VAT offence in the previous year;
• it has received a civil penalty for VAT evasion in the previous year;
• it uses a transaction type excluded from cash accounting without applying the correct separate treatment;
• its expected taxable turnover is over £1.35 million.

HMRC can refuse or withdraw use where revenue is at risk.

Do you need HMRC approval?

An eligible business normally starts without a separate application, from the beginning of a VAT period. Record the start date and apply the transitional rules. Unlike Annual Accounting, HMRC does not usually issue an approval schedule.

Which businesses benefit most?

• service businesses offering customers extended credit;
• businesses with slow-paying or higher-risk customers;
• traders whose supplier bills are paid faster than customer invoices;
• businesses wanting automatic timing relief for unpaid sales.

The scheme can be disadvantageous where customers pay immediately but suppliers offer long credit, because input VAT cannot be claimed until payment.

New VAT registrations

A newly registered business can use Cash Accounting if eligible. Pre-registration input tax follows separate rules and is not automatically delayed merely because the business adopts cash accounting. Configure opening debtors and creditors carefully.

Partly exempt businesses

A partly exempt business can use Cash Accounting but must still apply partial-exemption attribution and annual adjustments. Payment timing does not override recovery restrictions.

Flat Rate Scheme interaction

The Flat Rate Scheme offers its own cash-based turnover method. This is not necessarily membership of the separate Cash Accounting Scheme. Flat Rate eligibility uses a £150,000 entry threshold and restricted input-tax rules.

Annual Accounting interaction

A business can often combine Cash Accounting with Annual Accounting if it satisfies both schemes’ £1.35 million entry tests. It then recognises VAT by payment date while filing one annual return and making instalments.

Excluded transactions

Cash accounting does not generally cover certain:

• hire-purchase, lease-purchase and conditional-sale transactions;
• imports and acquisitions;
• reverse-charge supplies;
• goods invoiced in advance of specified exports;
• transactions governed by specialist schemes.

Account for excluded items under the correct normal rules while the rest of the business remains in the scheme.

When must you leave?

Leave where annual taxable turnover exceeds £1.6 million, usually from the end of the VAT period in which the threshold is exceeded. A limited temporary tolerance can apply with HMRC agreement. Other compliance failures can also require exit.

What happens on exit?

Normally account for VAT on outstanding customer debts and recover VAT on unpaid supplier invoices under the transitional rules, generally within the prescribed six-month period. Track invoices already included to prevent duplication.

Eligibility checklist

1. Confirm VAT registration.
2. Forecast 12-month taxable turnover below £1.35 million.
3. Check returns, payments and penalty history.
4. Identify excluded transactions.
5. Model customer and supplier payment timing.
6. Configure payment allocations and part payments.
7. Monitor the £1.6 million exit threshold.

Read the main VAT Cash Accounting guide.

Official guidance

• HMRC: Cash Accounting eligibility
• VAT Notice 731

This guide is general information. Check the transaction exclusions and live turnover forecast.