VAT Cash Accounting Scheme: How It Works for Small Businesses
The VAT Cash Accounting Scheme generally means you account for VAT when payment is received from a customer, rather than when an invoice is issued. For a business with slow-paying customers, this can avoid paying output VAT before the money has arrived. It also means input VAT is normally recovered when you pay suppliers.
Who can use cash accounting?
HMRC says a VAT-registered business may use the scheme where expected taxable turnover for the next 12 months is £1.35 million or less, provided other conditions are met. You cannot use the standard Cash Accounting Scheme together with the Flat Rate Scheme, which has its own cash-based method.
When can it be helpful?
- Customers routinely pay after the invoice date.
- You want VAT timing to mirror cash received and paid.
- Your bookkeeping clearly records payment dates and VAT treatment.
When should you take care?
Some transactions are excluded and some businesses may prefer normal accounting because it lets them recover input VAT sooner. HMRC also sets a £1.6 million exit threshold. Review your cash flow, supplier terms and VAT records rather than choosing solely for simplicity.
Practical next steps
- Check expected taxable turnover for the next 12 months.
- Make sure bookkeeping records the date each customer and supplier payment clears.
- Identify any transactions that use normal VAT accounting instead.
- Review the scheme when turnover approaches the exit threshold.
