Use VAT Cash Accounting

How Cash Accounting can help your cash flow by paying VAT only when you receive payment from customers. Includes eligibility criteria, how to join, record keeping requirements, and when you must leave the scheme.

UK-wide
Guide summary

You can use VAT Cash Accounting to pay VAT only when customers pay you, not when you invoice them. This helps if customers pay late. Check if your turnover is under £1.35 million to join. Keep records of when payments are made and received.

  • Pay VAT when customers pay you, not when invoiced
  • Join if turnover under £1.35 million in next year
  • Leave if turnover exceeds £1.6 million
  • Reclaim VAT when you pay suppliers
  • Keep payment records for 6 years
  • Cannot use with Flat Rate or Margin schemes
  • No need to tell HMRC when joining or leaving
  • Only pay VAT on money you receive
  • Automatic bad debt protection
  • Good for businesses with slow payers
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The VAT Cash Accounting Scheme changes when you account for VAT. Instead of paying VAT to HMRC when you issue invoices, you pay it when your customers actually pay you. This can significantly improve cash flow if you give credit to customers or deal with slow payers.

Under standard VAT accounting, you might issue an invoice on day one but not receive payment for 60 days - yet you would still owe HMRC the VAT immediately. Cash Accounting removes this timing mismatch.

How Cash Accounting changes VAT timing

The fundamental difference is simple but powerful:

  • Standard VAT accounting: You account for VAT when you issue or receive an invoice, regardless of whether payment has been made
  • Cash Accounting: You account for VAT when money actually changes hands

This applies in both directions. You pay VAT to HMRC when customers pay you, and you reclaim VAT on purchases when you pay your suppliers.

Output VAT timing
Account for VAT when you receive payment from customers
Input VAT timing
Reclaim VAT when you pay your suppliers
Key benefit
Never pay VAT to HMRC before you have received it

Is Cash Accounting right for your business?

Cash Accounting works well for some businesses but offers little benefit to others. Consider your typical payment patterns before joining.

Cash Accounting suits businesses that:

  • Offer credit terms to customers (30, 60, or 90 days)
  • Regularly deal with slow-paying customers
  • Have cash flow concerns
  • Pay suppliers more quickly than customers pay them

Cash Accounting may not suit businesses that:

  • Receive payment before or at the point of sale (retail, hospitality)
  • Pay suppliers on longer credit terms than they offer customers
  • Want to reclaim VAT on large purchases immediately
  • Make significant capital investments where immediate VAT reclaim matters

Example - when Cash Accounting helps: You invoice a customer for £12,000 including VAT (£10,000 + £2,000 VAT) on 1 April with 60-day payment terms. Under standard VAT, you owe HMRC the £2,000 VAT on your next return, even though the customer has not paid. Under Cash Accounting, you do not owe the VAT until the customer pays in June.

Example - when Cash Accounting does not help: You run a coffee shop where customers pay immediately. You already have the money before your VAT return is due, so Cash Accounting makes no difference to your cash flow.

Check if you can join

You can join the Cash Accounting Scheme if your VAT-taxable turnover is not expected to exceed £1.35 million in the next 12 months. This is the entry threshold.

Entry threshold
Taxable turnover must not exceed £1.35 million in next 12 months
Exit threshold
Must leave if taxable turnover exceeds £1.6 million
Taxable turnover
Total value of taxable supplies (excluding exempt supplies)
VAT registration
Must be VAT registered to use the scheme

Important: The entry threshold (£1.35 million) is lower than the exit threshold (£1.6 million). This provides headroom for growing businesses - you will not be forced out immediately if you have a good year.

TURNOVER 1350000

VAT Cash Accounting eligibility

Your expected VAT-taxable turnover in the next 12 months determines whether you can join. The entry threshold is £1.35 million - if you expect to exceed this, you cannot join.

Once in the scheme, you can stay until your turnover exceeds £1.6 million, giving you headroom for growth.

How to join the scheme

Joining Cash Accounting is straightforward - you do not need to apply to HMRC or wait for approval. You simply start using it.

  1. 1

    Check your eligibility

    Confirm your expected taxable turnover is below £1.35 million for the next 12 months. If you are close to the threshold, consider whether growth might push you over.

  2. 2

    Start using Cash Accounting

    From the start of any VAT period, begin recording VAT based on payment dates rather than invoice dates. No notification to HMRC is required.

  3. 3

    Update your record keeping

    Ensure your accounting system tracks payment dates for all sales and purchases. You need to know when payments were received and made, not just when invoices were issued.

  4. 4

    Adjust your VAT return process

    When completing VAT returns, include only the VAT on payments received and made during the period, not all invoices issued or received.

No application required: Unlike some other VAT schemes, you do not need HMRC's permission to use Cash Accounting. You also do not need to notify HMRC when you start or stop using it.

When to start: You can start using Cash Accounting from the beginning of any VAT period. Do not switch mid-period - this would create confusion in your records.

Record keeping requirements

Cash Accounting requires you to track payment dates, not just invoice dates. Your records must show when money actually changed hands.

  1. 1

    Record payment dates for sales

    For every sale, record the date you received payment from the customer. If payment is made in instalments, record each payment separately with its date.

  2. 2

    Record payment dates for purchases

    For every purchase, record the date you paid the supplier. Again, record partial payments separately if applicable.

  3. 3

    Link payments to invoices

    Maintain clear records showing which payments relate to which invoices. This is especially important for partial payments or when customers pay multiple invoices together.

  4. 4

    Calculate VAT on each payment

    Record the amount of VAT included in each payment. This is straightforward for full payment of a single invoice but needs care for combined or partial payments.

  5. 5

    Keep standard VAT records

    Continue keeping all standard VAT records including VAT invoices, credit notes, and your VAT account. These must be retained for at least 6 years.

Retention period
Keep all VAT records for at least 6 years
Payment dates
Record date of each payment received and made
Partial payments
Record each partial payment separately with date and VAT amount
Invoice linkage
Maintain clear records linking payments to specific invoices

Automatic bad debt protection

One significant benefit of Cash Accounting is automatic protection against bad debts. If a customer never pays, you never paid VAT on that invoice - there is nothing to reclaim.

Under standard VAT accounting, if a customer does not pay, you have already paid the VAT to HMRC. You can claim it back, but only after 6 months and with specific paperwork. Cash Accounting avoids this problem entirely.

Cash Accounting approach
No payment received = no VAT due to HMRC
Standard VAT approach
VAT paid upfront, bad debt relief claimable after 6 months
Administrative benefit
No bad debt relief claims needed under Cash Accounting

Compatibility with other VAT schemes

Cash Accounting can be used alongside some VAT schemes but not others. Check compatibility before joining.

Flat Rate Scheme
Not compatible - but Flat Rate has its own cash-based payment option
Annual Accounting Scheme
Compatible - can use both schemes together
VAT Margin Scheme
Not compatible for margin scheme goods
VAT Retail Schemes
Compatible - can use together

Combining with Annual Accounting: Using Cash Accounting with the Annual Accounting Scheme can be particularly beneficial. You submit only one VAT return per year (instead of four) and pay based on when you receive payment. This combination suits businesses with irregular cash flow.

Flat Rate alternative: If you want simplified VAT accounting, the Flat Rate Scheme has its own cash-based option. You cannot use Cash Accounting alongside Flat Rate, but Flat Rate lets you pay VAT based on when you receive payment from customers rather than when you invoice them.

When you must leave the scheme

You must leave Cash Accounting if your taxable turnover exceeds £1.6 million. You should also consider leaving if your circumstances change and the scheme no longer benefits you.

Mandatory exit threshold
Taxable turnover exceeds £1.6 million
When to leave
At the end of the VAT period in which turnover exceeds £1.6 million
Voluntary exit
Can leave at any time by reverting to standard VAT accounting

Transitioning out of Cash Accounting

When you leave Cash Accounting (whether mandatory or voluntary), you must account for VAT on all outstanding amounts in your first VAT return under standard accounting. This includes:

  • VAT on all invoices you have issued but not yet been paid for
  • VAT on all supplier invoices you have received but not yet paid

This can create a larger than usual VAT payment in your first return after leaving, so plan your cash flow accordingly.

Reasons to leave voluntarily

Even if below the exit threshold, you might choose to leave Cash Accounting if:

  • Your payment patterns change (e.g., you move to payment upfront)
  • You want to reclaim VAT on a major capital purchase immediately
  • You are joining the Flat Rate Scheme
  • Your suppliers now give you longer credit terms than you give customers

Planning major purchases: If you are planning a significant capital investment, consider temporarily leaving Cash Accounting to reclaim the VAT immediately. You can rejoin later if you still meet the entry threshold.

What to do next

If Cash Accounting suits your business, you can start using it from your next VAT period without any application. Here is how to proceed:

  1. 1

    Review your payment patterns

    Analyse how quickly customers pay you versus how quickly you pay suppliers. Cash Accounting benefits you most when customers pay slowly and you pay suppliers promptly.

  2. 2

    Check your accounting software

    Confirm your software can track payment dates and calculate VAT based on cash accounting principles. Most modern accounting packages support this.

  3. 3

    Plan your transition

    Choose a VAT period start date to begin. Do not switch mid-period. Ensure your record keeping is ready before you start.

  4. 4

    Consider combining with Annual Accounting

    If you want maximum cash flow benefit, look at using Cash Accounting with the Annual Accounting Scheme for one return per year plus cash-based VAT timing.

If you are unsure whether Cash Accounting will benefit your specific circumstances, consider speaking to an accountant. They can analyse your actual payment patterns and calculate whether the scheme would improve your cash flow.

VAT Cash Accounting Scheme (opens in a new tab)