VAT Cash Accounting Scheme: Pay VAT When You Are Paid

The VAT Cash Accounting Scheme lets you pay VAT on sales when your customers pay you, rather than when you invoice them, and reclaim VAT on purchases when you pay your suppliers. You can generally join if your estimated VAT taxable turnover for the next 12 months is £1.35 million or less.

For businesses that wait weeks or months to be paid, standard VAT accounting can mean handing HMRC money you have not yet received. Cash accounting fixes that timing gap. It is not right for everyone, though, and it has some exclusions. This guide explains how it works and who it suits.

Key takeaways

• Output VAT is due when customers pay; input VAT is reclaimed when you pay suppliers.
• You can generally join with estimated taxable turnover of £1.35 million or less.
• You must leave if turnover goes over £1.6 million.
• It cannot be combined with the separate Flat Rate Scheme.
• It suits businesses with slow-paying customers more than those that mostly reclaim VAT.

How cash accounting differs from standard VAT

Under standard (invoice) accounting, VAT on a sale is normally due in the VAT return covering the tax point, usually the invoice date, whether or not the customer has paid. Under cash accounting, that VAT goes on the return for the period in which payment is received. The same principle applies to purchases: you reclaim VAT when you pay, not when you receive the bill. HMRC's guidance is on GOV.UK's VAT Cash Accounting Scheme page and in VAT Notice 731.

Standard accounting vs cash accounting compared

Who it suits — and who it does not

Cash accounting tends to suit businesses that sell on credit to other businesses, such as trades, agencies and consultancies, where payment can arrive 30, 60 or 90 days after the invoice. It also gives automatic protection against bad debts, because VAT is never due on invoices that are not paid.

It is less helpful for businesses that are usually in a VAT repayment position, such as those making zero-rated sales, or for businesses that are paid at the point of sale anyway, like many shops and cafés, where the timing difference is negligible. Some transactions are excluded, such as goods bought or sold under hire purchase, lease purchase or conditional sale, and certain invoices issued in advance of supply; check the full list in VAT Notice 731.

Leaving the scheme

You must leave the scheme at the end of a VAT period if your VAT taxable turnover for the previous 12 months has gone over £1.6 million. You can also choose to leave at any time, for example if you start making mostly zero-rated sales and would rather reclaim input VAT earlier. HMRC can also remove a business from the scheme in certain circumstances, such as persistent late returns or misuse.

Leaving needs care, because sales invoiced but not yet paid under cash accounting have not been accounted for. When you leave, you generally have to account for the VAT on all outstanding sales and purchases, either straight away or over a transitional period, depending on why you are leaving. That can create a larger VAT bill in the period you exit, so plan the timing and set money aside. The detailed rules are in VAT Notice 731.

Step by step: switching to cash accounting

1. Check eligibility: turnover, up-to-date returns and payments, and no recent scheme exclusions.
2. Decide the start date, normally the start of a VAT period.
3. Set your software to cash accounting from that date.
4. Handle the changeover: invoices already accounted for under standard accounting must not be counted again.
5. Record payment dates accurately for every sale and purchase.
6. Keep invoices as usual; cash accounting changes timing, not paperwork.
7. Monitor turnover so you know if you pass the £1.6 million exit limit.

Worked example (illustrative example)

"Kiln Street Joinery Ltd", an invented illustrative example, invoices a building contractor £12,000 plus £2,400 VAT on 20 September 2026. Its VAT quarter ends on 30 September, and the contractor pays on 25 October.

Under standard accounting, the £2,400 of VAT would be due on the return for the quarter to 30 September, before the company had been paid. Under cash accounting, it goes on the return for the quarter to 31 December, because that is when the money arrived. The joinery firm also pays its timber supplier on 30-day terms, so it reclaims that VAT a little later than before, but on balance cash accounting eases its cash flow. The company and figures are invented to illustrate the timing.

Common mistakes

• Counting VAT twice on invoices raised before the switch and paid after it.
• Using cash accounting on excluded transactions such as hire purchase.
• Combining it with the Flat Rate Scheme.
• Missing the exit limit as the business grows.
• Not recording payment dates, which the scheme depends on.

Get your VAT scheme right

Our VAT returns service starts from £120 per quarter and includes advice on which accounting scheme suits your business. Compare the alternatives in our guide to the Flat Rate Scheme vs standard VAT, and make sure your paperwork is in order with our VAT invoice checklist.

Waiting to be paid but paying HMRC anyway? Talk to us or see our pricing.