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What is VAT Cash Accounting?

Lucy Cohen
Updated

VAT Cash Accounting is a way of working out when you pay VAT to HMRC.

Under standard VAT accounting, you pay VAT based on the date on your invoice, even if your customer has not paid you yet.

Under VAT Cash Accounting, you only:

  • Pay VAT to HMRC when your customer has paid you

  • Reclaim VAT on purchases when you have paid your supplier

This can help with cash flow, especially if your customers take time to pay.

Who can use VAT Cash Accounting?

You can use VAT Cash Accounting if:

  • You are VAT registered

  • Your estimated VAT taxable turnover is £1.35 million or less, excluding VAT

You must leave the scheme if your VAT taxable turnover goes over £1.6 million.

These thresholds are set by HMRC and should be reviewed if your turnover is increasing.

Full details are available on the HMRC website:
https://www.gov.uk/vat-cash-accounting

How does it work in practice?

Here is a simple example.

You issue an invoice for £1,000 plus £200 VAT in January.

Under standard VAT accounting:

  • You include the £200 VAT on your next VAT return, even if the customer has not paid yet

Under VAT Cash Accounting:

  • You only include the £200 VAT on your VAT return once the customer has actually paid you

The same applies to your purchases. You can only reclaim VAT once you have paid the supplier.

Advantages of VAT Cash Accounting

  • You do not pay VAT to HMRC before receiving payment from your customer

  • It can improve cash flow

  • It can reduce the risk of paying VAT on bad debts

Disadvantages of VAT Cash Accounting

  • You cannot reclaim VAT on supplier invoices until you have paid them

  • It may be less suitable if your customers pay quickly but you take longer to pay suppliers

Is VAT Cash Accounting right for you?

VAT Cash Accounting can be helpful for businesses that:

  • Offer credit terms to customers

  • Experience late payments

  • Want to better manage cash flow

If most of your customers pay immediately and you pay suppliers on longer terms, the benefit may be limited.

It is important to review your payment patterns before deciding whether this scheme is suitable for your business.

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