Cash Accounting Scheme for VAT

Using standard VAT accounting, you pay VAT on your sales whether or not your customer has paid you. Using cash accounting, you do not need to pay VAT until your customer has paid you. If your customer never pays you, you never have to pay the VAT.

You can use cash accounting if your estimated VAT taxable turnover during the next tax year is not more than £1.35 million.

You can continue to use cash accounting until your VAT taxable turnover exceeds £1.6 million.

On this page:

What is the Cash Accounting Scheme?

Using standard VAT accounting you:

  • pay VAT on any invoices you have issued, even if you have not received the payment from your customer
  • reclaim VAT on any invoices you have received, even if you have not yet paid your supplier

Using the Cash Accounting Scheme, you:

  • pay VAT on your sales when your customers pay you
  • reclaim VAT on your purchases when you have paid your suppliers

Top

Who can use the Cash Accounting Scheme

You can use the Cash Accounting Scheme if your estimated VAT taxable turnover during the next tax year is not more than £1.35 million. Your VAT taxable turnover includes any standard, reduced and zero-rated sales and other VAT taxable supplies, but excludes VAT itself, supplies that are exempt from VAT, and capital asset sales.

Once you start to use cash accounting, you can continue to do so until your VAT taxable turnover reaches £1.6 million.

Who cannot use the Cash Accounting Scheme

You cannot use cash accounting if:

  • you are not up-to-date on your VAT Returns and VAT payments
  • you have been convicted of a VAT offence or charged a penalty for VAT evasion in the last year
  • your VAT taxable turnover is over £1.35 million per year

When you must not use cash accounting

Even if you use cash accounting, you must still account for VAT using standard VAT accounting when you:

  • buy or sell goods using lease purchase, hire purchase, conditional sale or credit sale
  • import goods or acquire goods from other EU states
  • remove goods from a Customs warehouse or free zone
  • issue a VAT invoice that isn't due to be paid for six months or more
  • issue a VAT invoice in advance of providing goods or services

Top

The pros and cons of the Cash Accounting Scheme

Benefits of cash accounting

Using cash accounting may help your cash flow, especially if your customers are slow payers. You do not need to pay VAT until you have received payment from your customers. So if a customer never pays you, you don't have to pay VAT on that bad debt as long as you continue to use the Cash Accounting Scheme.

Disadvantages of cash accounting

Dependant on your own circumstances, there may be some disadvantages to using cash accounting:

  • You cannot reclaim VAT on your purchases until you have paid your suppliers. This can be a disadvantage if you buy most of your goods and services on credit.
  • If you regularly reclaim more VAT than you pay, you will usually receive your repayment later under cash accounting than under standard VAT accounting, unless you pay for everything at the time of purchase.
  • If you start using cash accounting when you start trading, you will not be able to reclaim VAT on most start up expenditure, such as initial stock, tools or machinery, until you have actually paid for those items.
  • If you leave the Cash Accounting Scheme you will have to account for all outstanding VAT due including any bad debts.

Top

Additional record-keeping for the Cash Accounting Scheme

Changing to cash accounting doesn't mean you can just keep a record of your cash position - you must also keep track of debtors and creditors, so you know the real position with regard to what you owe and are owed. You need this information for Income Tax or Corporation Tax purposes.

In addition to keeping all required VAT records and accounts for standard VAT accounting, you must also use the following procedures for sales and purchases.

Invoices

If you are paid in cash you must, if asked by your customer, endorse the customer's copy of your sales invoice with the amount and date paid.

If you settle an invoice using cash, you must keep a copy of the purchase invoice endorsed with the amount and date paid.

Payment records

Your records must clearly cross-refer payments received or made by you to the corresponding sales or purchase invoices. You must also make sure that you cross-refer these payments and receipts to evidence such as bank statements, cheque stubs and paying-in slips.

Top

Joining and leaving the Cash Accounting Scheme

Joining the Cash Accounting Scheme

You do not need to complete an application form or advise HM Revenue & Customs (HMRC) to start using the Cash Accounting Scheme.

You can start using the Cash Accounting Scheme:

  • at the beginning of any VAT period if you are already registered for VAT
  • from the day your VAT registration starts if you are not already registered

If you are already registered for VAT when you start using cash accounting, you must make sure that you do not account for VAT twice on any sales or purchases. You must identify and separate any transactions in your records that you have already accounted for using standard VAT accounting.

Leaving the Cash Accounting Scheme

You may leave the Cash Accounting Scheme voluntarily at the end of any VAT accounting period. You do not need to notify HMRC. You can rejoin at the beginning of any VAT accounting period, provided you meet the criteria at that point in time.

You must leave the scheme if your VAT taxable turnover is over £1.6 million.

HMRC may also withdraw your use of the Cash Accounting Scheme for a number of reasons, including:

  • if you calculate your VAT incorrectly
  • if you are convicted of a VAT offence
  • if you are assessed for a penalty for VAT evasion
  • if your VAT taxable turnover has gone over £1.6 million and you have not notified HMRC

Once you have left the scheme you must account for any outstanding VAT. You can either:

  • account for all of the outstanding VAT in the period that you stop using the scheme, or
  • opt to account for the outstanding VAT within six months of leaving the scheme.

But the option of a further six months is not available if:

  • use of the scheme has been withdrawn from you, or
  • your turnover has exceeded £1.6 million and the value of your supplies in the previous three months was greater than £1.35 million.

Top

Using the Cash Accounting Scheme with other schemes

You may be able to use the Cash Accounting Scheme together with some of the following VAT schemes:

Annual Accounting Scheme

Using annual VAT accounting, you make nine monthly or three quarterly interim payments throughout the year. You only need to complete one VAT Return at the end of the year when you either make a balancing payment or receive a balancing refund.

Get information on the Annual Accounting Scheme

Flat Rate Scheme

You can't use the Cash Accounting Scheme with the Flat Rate Scheme. Instead, the Flat Rate Scheme contains its own cash-based turnover method.

Get information about the Flat Rate Scheme

Retail schemes

If you are a retailer, there are several schemes where you can simplify your calculation of VAT by not having to account for VAT on each individual sale.

Get information about the retail schemes

Margin schemes for second-hand goods, art, antiques, collectibles

If you buy or sell second-hand goods, antiques, collectibles or art, you only need to account for VAT on the difference between the price you paid for an item and the price at which you sell it - your margin.

Get information about the second-hand goods et al margin schemes

Tour Operator's Margin Scheme

The Tour Operator's Margin Scheme makes VAT accounting easier for tour operators who buy and sell travel, accommodation and certain other services internationally.

More about VAT and tour operators in VAT Notice 709/5

Top

For more information

Read more about the Cash Accounting Scheme in VAT Notice 731

Top