The VAT Cash Accounting Scheme: pay VAT when

2 min read

£1.35mJoin-up turnover limit

When paidVAT due on receipt

Bad debtsNo separate relief needed

Amount (£)

VAT rate (%)

Adds VAT to a net figure and strips VAT out of a gross figure at any rate.

How cash accounting changes the timing

Under standard accrual VAT you pay output VAT to HMRC based on the invoice date. If you invoice £24,000 (including £4,000 VAT) on 1 March but the customer pays in June, you may still owe that £4,000 in your March-quarter return. Cash accounting lets you account for the VAT in the quarter you are actually paid, so the VAT never leaves your account before the customer's money arrives.

Who can use it

You can join if your estimated VAT-taxable turnover for the next 12 months is £1.35 million or less, and you must leave once turnover exceeds £1.6 million. It suits businesses that invoice on credit terms and wait to be paid — the opposite profile to a shop that takes cash at the till.

The cash-flow upside

For a company with debtor days of 60 or more, cash accounting removes one of the nastiest timing traps in the VAT system: funding the taxman before your customer funds you. It also gives automatic bad-debt protection — if a customer never pays, you never owed the VAT, so there is nothing to reclaim.

The trade-off

You also only reclaim input VAT when you pay your suppliers, so a business that buys on long credit and sells for cash can be worse off. If you make big VATable purchases and want the reclaim quickly, standard accounting may serve you better. Model both against your real payment patterns.

When finance still helps

Cash accounting smooths the timing but does not shrink the bill. When a large VAT payment still collides with payroll or a tax instalment, a short working-capital facility bridges the gap and is repaid as customers pay you.

Credicorp lends to your company, not to you personally, and takes no personal guarantee. See indicative terms on business loans, or apply online in minutes.

Read understanding your VAT bill.

Frequently asked questions

Does cash accounting reduce the VAT I owe?

No. It changes only the timing — you pay the same VAT overall, but you account for it when cash moves rather than when invoices are raised. The benefit is cash flow, not a lower bill.

Can I use cash accounting and the Flat Rate Scheme together?

The Flat Rate Scheme has its own cash-based turnover method built in, so you would not use the standard Cash Accounting Scheme on top. Compare the two on our <a href="/guides/flat-rate-vs-standard-vat-guide/">flat rate vs standard VAT</a> guide.

What happens if my turnover grows past the limit?

You must leave the scheme once VAT-taxable turnover exceeds £1.6 million, moving to standard accounting from the start of the next VAT period. Plan the switch, because the changeover can pull forward VAT you had deferred.