The VAT cash accounting scheme is one of the most popular VAT schemes available offering some of the best cash flow benefits to small businesses, especially given the ability to combine it with other VAT schemes. Here’s an overview of the cash accounting scheme, the advantages and disadvantages and how to apply to join.
Updated 22 July 2021
Table of contents
1. What is the Cash Accounting Scheme?
Usually, when a business is registered for VAT they must pay or reclaim the difference between the VAT added to sales invoices raised and purchases invoices received, regardless of whether they are paid or not. With cash accounting business can:
- Pay VAT each quarter according to the invoices that custom on the money your customers have paid you;
- Claim VAT back on expenses based on what you have paid your suppliers.
2. Example of the Cash Accounting Scheme for VAT
You raise a sales invoice of £10,000 plus VAT of £2,200 which was not paid at the end of your VAT quarter and have received a purchase invoice for £5,000 plus VAT of £1,000, which you paid during the VAT quarter.
Under the standard scheme you’ll need to pay VAT of £1,200 (£2,200 – £1,000), regardless of payments that have happened. But under cash accounting, you’ll claim a VAT repayment of £1,000 which is the VAT you paid on your purchases.
This helps cash flow because you aren’t paying VAT to HMRC on invoices that your customers haven’t paid you for.
3. Who Can Join the Cash Accounting Scheme?
You cannot use the scheme if you are:
- Registered for the flat-rate VAT scheme because this has separate rules regarding cash accounting;
- Behind on your VAT returns;
- Have committed a VAT offence in the last 12 months.
In addition, even if you are registered for cash accounting you cannot use it for certain transactions including:
- for VAT invoices with payment terms of 6 months or more;
- when a VAT invoice is raised in advance;
- goods imported from within the EU;
- buy or sell goods using lease purchase, hire purchase, conditional sale or credit sale;
- moving goods outside a customs warehouse
4. How to Apply to Use VAT Cash Accounting
You don’t actually need to notify HMRC that you wish to use the VAT cash accounting scheme, you can just adopt this method at the start of a VAT quarter or as soon as you VAT register. But it is your responsibility to check that you are eligible to use it.
If you chose to use cash accounting you cannot switch between this scheme and the standard VAT scheme each quarter, so you need to commit to the cash accounting scheme you have chosen to use it. It is also your responsibility to monitor your taxable turnover to make sure you remain within the thresholds.
5. Advantages of Cash Accounting
The advantage of this scheme is the cash flow benefits it can bring, especially if you have slow-paying customers because the trigger date for paying VAT is the date you get paid, not when you raise the invoice. And if you do have a bad debt, another benefit is that you’ll never need to pay the VAT over to HMRC.
6. Disadvantages of Cash Accounting
The disadvantage of cash accounting is that you cannot reclaim VAT on purchases that you have not paid for. That means that this scheme may not suit businesses that have a significant amount of purchases for example they have just set up a business or have stock.
7. How to Leave the Scheme
Once you exceed the cash accounting threshold, you must leave the scheme once your taxable turnover exceeds £1.6m. You’ll need to leave at the end of a VAT quarter not partway through and again, you don’t need to tell HMRC but you should keep VAT records noting what you have done and your calculations.
You need to report and pay all outstanding VAT, whether your customers have paid you or not. It is possible to pay outstanding VAT over 6 months by setting up a time to pay arrangement with HMRC, but you’ll need to make sure you pay any future VAT on time.
8. Bookkeeping for Cash Accounting
In recent years, HMRC has taken steps to begin digitising the entire tax system (known as Making Tax Digital) which includes submission of VAT returns using approved bookkeeping software. Instead of filling out a manual VAT return with total figures, VAT registered businesses must maintain their bookkeeping electronically so that the software calculates the figures that go onto each VAT return and submits them electronically to HMRC.
This means if you are VAT registered, whether using cash accounting, standard scheme or any other scheme, you’ll need to do your bookkeeping on an HMRC approved software. Then when you’re ready to submit your VAT return, you’ll do that through your cloud-based system. It is important you choose a bookkeeping software that can handle cash accounting such Xero.