Key takeaways
- Under cash accounting you pay VAT on sales when your customer pays you, and reclaim VAT on purchases when you pay your supplier.
- You can join if you expect VAT taxable turnover of £1.35 million or less and must leave once it passes £1.6 million.
- You do not need to apply: you can start at the beginning of a VAT period if you meet the conditions.
- It gives automatic bad debt relief, because you never pay VAT on a sale that is not paid.
- It cannot be combined with the Flat Rate Scheme, which has its own cash-based turnover option.
Under standard VAT accounting, VAT is due on the date of the invoice, so you can owe HMRC VAT on a sale weeks or months before the customer pays. The Cash Accounting Scheme moves the tax point to the date money changes hands. For businesses that give credit, or whose customers pay slowly, it can make a real difference to cash flow.
How cash accounting works
| Standard (invoice) accounting | Cash accounting | |
|---|---|---|
| Output VAT on sales | Due in the period the invoice is issued | Due in the period the customer pays |
| Input VAT on purchases | Reclaimed in the period of the supplier’s invoice | Reclaimed in the period you pay the supplier |
| Unpaid sales invoices | VAT paid, then reclaimed later through bad debt relief | No VAT due until paid |
Worked example
A marketing consultancy invoices a client £12,000 plus £2,400 VAT on 20 March, at the end of its quarter to 31 March. The client pays on 25 May.
- Standard accounting: the £2,400 goes on the return for the quarter to 31 March, due by 7 May, before the client has paid.
- Cash accounting: the £2,400 goes on the return for the quarter to 30 June, due by 7 August, after the money has arrived.
The other side of the scheme is that input VAT is delayed too. If you buy on credit, you cannot reclaim the VAT until you have paid the supplier.
Who can use it
You can use cash accounting if:
- you are VAT-registered
- you expect your VAT taxable turnover in the next 12 months to be £1.35 million or less, excluding VAT
- your VAT returns and payments are up to date, or you have an arrangement with HMRC to pay what you owe
- you have not been convicted of a VAT offence, or charged a penalty for VAT evasion, in the last 12 months
There is no application. You start using the scheme from the beginning of a VAT period and keep records that show the payment dates.
What is excluded
Even within the scheme, some transactions must be accounted for under the normal rules:
- goods sold on hire purchase, lease purchase, conditional sale or credit sale agreements
- invoices where payment is not due until more than six months after the invoice date
- invoices issued in advance of the goods or services being supplied
- goods you buy or sell under a margin scheme
- imports and goods removed from a bonded warehouse
The scheme also cannot be used alongside the Flat Rate Scheme. If you use the Flat Rate Scheme you can choose its own cash-based method of calculating turnover instead. Cash accounting can be combined with the Annual Accounting Scheme.
Records you need
Your records must show the date each payment was received or made, so that VAT lands in the right period. In practice that means:
- reconciling your bank account to your sales and purchase invoices
- recording part payments correctly; VAT is due on the proportion of the invoice paid
- keeping evidence of cash payments, such as receipts or paying-in records
Most accounting software has a cash accounting setting. Make sure it is switched on from the first period you use the scheme, and that it handles part payments and allocations correctly. Your records and return must still meet Making Tax Digital for VAT rules.
Leaving the scheme
You must leave if your VAT taxable turnover for the previous 12 months is more than £1.6 million. You can also leave voluntarily at the end of any VAT period.
When you leave, you have to account for the VAT on all invoices that have been issued or received but not yet paid, because under standard accounting it would already have been declared. If you leave because turnover passed £1.6 million, you can spread that VAT over the following six months. If you leave voluntarily, you account for it on the return for the period in which you leave.
Who benefits
Cash accounting tends to suit:
- businesses that give credit terms and are paid 30, 60 or 90 days after invoicing
- businesses with a history of late payers or bad debts
- service businesses whose main costs, such as wages, carry no VAT and so give little input tax to delay
It is less useful for:
- retailers and other businesses paid at the point of sale, where invoice and payment dates are the same
- businesses that usually reclaim more VAT than they pay, because cash accounting delays their repayments
- businesses that buy heavily on credit and want input VAT back as soon as they are invoiced
Bad debt relief comes built in
Outside the scheme, if a customer never pays you can only reclaim the VAT you paid on the sale through bad debt relief once the debt is six months overdue and written off. Under cash accounting the VAT is never paid in the first place, so there is nothing to reclaim and no six-month wait.
Frequently asked questions
Do I need HMRC’s permission to use cash accounting?
No. If you meet the conditions you can start at the beginning of a VAT period. Keep records showing when you joined and the payment dates for every transaction.
Can I use cash accounting and the Flat Rate Scheme together?
No. The Flat Rate Scheme has its own cash-based turnover method, which gives a similar effect for businesses on that scheme.
What happens if a customer pays part of an invoice?
You account for VAT on the amount received. If a customer pays half a £1,200 invoice that included £200 VAT, you declare £100 of output VAT in that period.
What is the turnover limit for cash accounting?
You can join with expected VAT taxable turnover of up to £1.35 million and must leave once turnover for the previous 12 months exceeds £1.6 million.
Does cash accounting change how much VAT I pay overall?
No. It changes when you pay and reclaim VAT, not the total, apart from the built-in protection against VAT on sales that are never paid.
Sources
Rates, thresholds and rules in this guide were checked against HMRC and GOV.UK guidance in October 2026. Tax rules change, so check the current position on GOV.UK or with a qualified adviser before acting. This guide is general information, not personal advice.