VAT Cash Accounting

Under the cash accounting scheme you account for VAT on the basis of payments you receive and make, rather than on invoices you issue and receive. The main benefit of this scheme is that you don’t have to pay VAT on invoices you have issued until your customers pay you, although it also means you can’t reclaim VAT on purchases until you pay your suppliers. You get automatic bad debt relief because, if no payment is received, no output tax is due.

Who can use the scheme?

You can choose this scheme if you expect the value of your taxable supplies (excluding VAT) during the next year (beginning at the start of a tax period) will not exceed £1,350,000 and…

• you have sent in all the VAT returns due at the time you start to use the scheme;
• you have not been convicted of a VAT offence in the last year;
• you have not received a penalty for VAT evasion involving dishonest conduct in the last year;
• you do not owe any VAT or you have made arrangements with Revenue and Customs to clear the total amount of your outstanding VAT payments (including surcharges and/or penalties);

Your business can continue using the scheme until its annual taxable turnover reaches £1,600,000. You may use the cash accounting basis for a further six months to account for any VAT outstanding on supplies made and received while using the scheme, or you can account for all the outstanding VAT due in the period you cease to use the scheme. Any VAT still outstanding at the end of the six month period must be accounted for on the VAT return ending then.

You don’t need to apply to use this scheme, and you can change to it at the beginning of any tax period. If your business is already registered for VAT when you start, you must make sure you don’t account for VAT twice on any supplies made or received previously. You cannot retrospectively apply the cash accounting scheme to your business.

The cash accounting scheme can be used together with the annual accounting scheme, or flat rate scheme for small businesses.

How we can help you

We can advise you on whether the cash accounting scheme would be suitable for your business and on any changes needed to your record keeping.