Can a small business use VAT Cash Accounting?

Yes. A VAT-registered business can use the scheme if it expects VAT taxable turnover of £1.35 million or less in the next 12 months and meets HMRC's other conditions.

Do I need HMRC permission to join cash accounting?

No. Businesses do not need to tell HMRC when they join. They can start using the scheme from the beginning of a VAT accounting period.

When is VAT paid under cash accounting?

VAT is paid when customers pay the business. VAT on purchases is reclaimed when suppliers are paid.

Can I leave the VAT Cash Accounting Scheme whenever I want?

Yes. A business can leave at the end of any VAT accounting period. It must deal with outstanding VAT on unpaid transactions when leaving.

Can I use cash accounting with the VAT Flat Rate Scheme?

No. The VAT Cash Accounting Scheme and VAT Flat Rate Scheme cannot be used together.

Is VAT Cash Accounting always better than invoice accounting?

No. It depends on the business. Cash accounting is often useful for businesses waiting for customer payments, but invoice accounting may suit businesses that want to reclaim purchase VAT sooner.

VAT Cash Accounting Scheme Explained: UK Guide

The VAT Cash Accounting Scheme is a VAT reporting method that allows eligible UK businesses to pay VAT based on when money actually moves rather than when invoices are issued. It can be a useful way for smaller businesses to improve cash flow because VAT is only paid to HMRC after customers have paid their invoices.

Under cash accounting, a business pays output VAT on sales when payment is received from customers and reclaims input VAT on purchases when payments are made to suppliers. This differs from standard invoice accounting, where VAT is generally due based on the date an invoice is issued, even if the customer has not paid yet.

For businesses that regularly wait for customer payments, the scheme can reduce the pressure of paying VAT before cash has entered the business. However, it is not automatically the best option for every VAT-registered business. Businesses should consider their payment patterns, supplier arrangements and expected turnover before deciding whether to use it.

2026/27 context: the standard UK VAT rate is 20%, with 5% and 0% rates for specific supplies, and the VAT registration threshold is £90,000 of taxable turnover.

What is the VAT Cash Accounting Scheme?

The VAT Cash Accounting Scheme is an HMRC scheme that changes the timing of VAT reporting. Instead of recording VAT when invoices are raised or received, businesses record VAT when payments are actually made or received.

The scheme works as follows:

Sales: Output VAT is declared when the customer pays.
Purchases: Input VAT is reclaimed when the business pays the supplier.

For example, if a business sends a customer an invoice in January but receives payment in March, the VAT is normally included in the March VAT return when using cash accounting.

Under standard invoice accounting, the VAT would usually be accounted for based on the January invoice date.

This difference can be important for businesses that offer customers payment terms, because cash accounting prevents VAT becoming payable before the related income has been received.

How does VAT Cash Accounting differ from standard VAT accounting?

Most VAT-registered businesses use standard invoice accounting unless they choose another method. With invoice accounting, VAT is reported according to invoice dates.

This means:

A sales invoice creates output VAT due, even if the customer has not paid.
A supplier invoice may allow input VAT recovery, even if the supplier has not yet been paid.

Cash accounting reverses this timing.

For example, a business issues a customer invoice for £12,000 plus £2,400 VAT on 1 June. The customer pays on 1 August.

Using standard VAT accounting, the VAT is normally included according to the June invoice date.

Using cash accounting, the £2,400 output VAT is included when the £14,400 payment arrives in August.

The choice between the two methods depends on whether delaying VAT payments is more valuable than recovering purchase VAT earlier.

Who can use VAT Cash Accounting?

A business can use the VAT Cash Accounting Scheme if it meets HMRC's conditions.

The main joining requirement is that the business expects its VAT taxable turnover to be £1.35 million or less in the next 12 months.

VAT taxable turnover includes supplies that are:

Standard-rated at 20%.
Reduced-rated at 5%.
Zero-rated at 0%.

It does not include exempt supplies.

For the 2026/27 tax year, key VAT figures include:

VAT registration threshold: £90,000.
Standard VAT rate: 20%.
Reduced VAT rate: 5%.
Zero-rated VAT: 0%.

A business does not have to use cash accounting simply because it qualifies. It is an option that eligible businesses can choose based on their circumstances.

How do you join the VAT Cash Accounting Scheme?

Businesses do not need to apply to HMRC or receive approval before using the scheme.

If a business is eligible, it can start using cash accounting from the beginning of a VAT accounting period.

For example, if a business submits quarterly VAT returns and its new VAT quarter begins on 1 April, it can begin using cash accounting from that date.

Although HMRC notification is not required, businesses should make sure their accounting records clearly show:

The date customer payments were received.
The date supplier payments were made.
The VAT included in each payment.

Accurate records are essential because VAT returns will be based on payment dates rather than invoice dates.

Worked VAT Cash Accounting example

A business issues sales invoices during a VAT quarter with the following figures:

Sales value: £60,000
VAT at 20%: £12,000
Total invoices issued: £72,000

At the end of the quarter, customers have only paid £36,000 including VAT.

Because the business uses cash accounting, it only accounts for VAT on the money actually received.

The output VAT calculation is:

£36,000 × 1/6 = £6,000

The business therefore reports £6,000 of output VAT.

During the same quarter, the business pays suppliers £24,000 including VAT.

The input VAT calculation is:

£24,000 × 1/6 = £4,000

The business can reclaim £4,000 of input VAT.

The VAT return calculation is:

Output VAT: £6,000
Less input VAT: £4,000
VAT payable to HMRC: £2,000

The business pays HMRC £2,000.

Under invoice accounting, the VAT position could be different because VAT may have become due based on invoices issued rather than customer payments received.

Do you need to tell HMRC when you start using cash accounting?

No. Eligible businesses do not need to inform HMRC that they are joining the VAT Cash Accounting Scheme.

The business simply starts using the scheme at the beginning of a VAT accounting period.

However, businesses should not switch methods part way through a VAT period because this can create incorrect VAT reporting. Proper records should be kept to show which transactions fall under cash accounting and which follow normal VAT rules.

When must a business leave the VAT Cash Accounting Scheme?

A business must stop using the scheme if its VAT taxable turnover exceeds £1.6 million.

Once the business passes this limit, it must move back to standard VAT accounting rules.

A business can also leave the scheme voluntarily. It can leave at any time, but the change must take place at the end of a VAT accounting period.

When leaving, businesses need to consider unpaid invoices and outstanding VAT amounts because VAT may still need to be reported on transactions that were accounted for using cash accounting.

What happens to unpaid invoices when leaving the scheme?

When a business leaves cash accounting, it may have unpaid customer invoices that have not yet been included in VAT returns.

These outstanding amounts must still be reported and VAT must be paid to HMRC.

Normally, the business can account for these outstanding amounts over a period of six months.

However, if the business exceeded the £1.35 million joining threshold in the previous three months, the outstanding VAT must be reported and paid immediately.

Businesses should review all unpaid sales invoices and unpaid purchase invoices before changing VAT accounting methods.

Can you use VAT Cash Accounting with the Flat Rate Scheme?

No. A business cannot use the VAT Cash Accounting Scheme together with the VAT Flat Rate Scheme.

The two schemes work differently.

The VAT Flat Rate Scheme calculates VAT payments using a fixed percentage based on the business type, while cash accounting changes the timing of VAT recognition.

A business using the Flat Rate Scheme would need to leave that scheme before using cash accounting, if eligible.

Transactions excluded from VAT Cash Accounting

Some transactions cannot be included under the VAT Cash Accounting Scheme.

Payment terms of six months or more

Sales and purchases with payment terms of six months or longer are excluded.

These transactions must be treated under the normal VAT rules rather than cash accounting.

Invoices raised in advance

Invoices issued before a supply takes place cannot normally be included under cash accounting.

For example, if a business invoices a customer several months before providing a service, the VAT treatment may need to follow invoice accounting rules.

Hire purchase and credit arrangements

Cash accounting cannot be used for certain finance-based transactions, including:

Hire purchase agreements.
Conditional sale agreements.
Credit sale arrangements.

These transactions have separate VAT treatment requirements.

Importing goods from the EU into Northern Ireland

Businesses cannot use cash accounting for importing goods from the EU into Northern Ireland.

These transactions must follow the specific VAT rules that apply to imports.

Moving goods out of a customs warehouse

The movement of goods out of a customs warehouse is also excluded from cash accounting.

Businesses involved in customs warehousing should check the correct VAT treatment for these movements.

Advantages of VAT Cash Accounting

The biggest advantage of cash accounting is improved cash flow.

A business does not need to pay VAT on sales until customers have actually paid. This can be especially helpful for businesses that:

Offer credit terms.
Work on long projects.
Have customers who pay slowly.

Other benefits include:

Easier VAT planning because VAT payments match cash received.
Lower risk of paying VAT on unpaid customer invoices.
A simpler approach for businesses that already manage accounts on a cash basis.

For example, a business with £30,000 of unpaid invoices at the end of a VAT quarter does not immediately pay VAT on those invoices under cash accounting.

Disadvantages of VAT Cash Accounting

Although cash accounting can improve cash flow, it also has disadvantages.

A business may not benefit if:

Customers usually pay immediately.
Suppliers allow long payment terms.
The business wants to reclaim VAT on purchases before paying suppliers.

Because input VAT can only be reclaimed once suppliers have been paid, some businesses may recover VAT later than they would under invoice accounting.

Businesses should compare both methods before choosing.

Keeping records for cash accounting

Good bookkeeping is essential when using the VAT Cash Accounting Scheme.

Records should include:

Customer invoices.
Customer payment dates.
Supplier invoices.
Supplier payment dates.
VAT amounts included in payments.

Accounting software can often be configured to use cash accounting VAT reports, helping businesses prepare accurate VAT returns.

VAT Cash Accounting Scheme Explained