What is a VAT Cash Accounting Scheme?

The VAT Cash Accounting Scheme provides a way of reporting VAT based only on the funds you receive against the actual payments you make.

The scheme follows the principles of cash accounting and many businesses find it useful for cash flow, as they only pay VAT on what they’ve received rather than invoices raised (which may take weeks or months before they are paid).

Although businesses across the UK use the VAT Cash Accounting Scheme, it’s best to speak with a professional accountant or trusted tax adviser to find out if the scheme is right for you.

If your business is VAT-registered and you want to apply for the scheme, read on to find out if you’re eligible and the advantages that come with joining.

Who is Eligible for the VAT Cash Accounting Scheme?

To be able to join the VAT Cash Accounting Scheme, you must meet the eligibility criteria. You can use cash accounting if:

• Your business is VAT-registered
• Your estimated VAT taxable turnover is £1.35m or less (in the following 12 months)

If you’re unsure what VAT-taxable turnover is, it’s essentially the total of everything sold that’s not VAT-exempt.

Unfortunately, some businesses don’t meet the criteria to be accepted for the VAT Cash Accounting Scheme. They’re usually not accepted because:

• They’re behind on VAT returns
• They have outstanding VAT payments
• They’ve committed a VAT-related offence in the past year
• You use the VAT Flat Rate Scheme

You also can’t use the VAT Cash Accounting Scheme for certain transactions, such as:

• When payment terms of a VAT invoice are six months or longer
• When a VAT invoice is raised in advance
• When you’re buying or selling goods using either lease purchase, conditional purchase, hire purchase, or credit sale
• Goods imported from the EU to Northern Ireland
• Goods being moved outside of a customer warehouse

You would need to use Standard VAT Accounting for any of the above transaction types. If you’re unsure whether you’re eligible, accountants will likely know if you are before you consider applying.

The Advantages of the VAT Cash Accounting Scheme

Unlike the Standard VAT Accounting Scheme, the VAT Cash Accounting Scheme is a little different.

The scheme comes with several benefits, with one of the main advantages being that it doesn’t require businesses in the UK to pay VAT on invoices that don’t get paid. Additionally, the VAT Accounting Scheme also:

• Tell you how much VAT you owe
• Improves your cash flow
• Automatically protects against bad debts
• Makes it easier to manage VAT
• Provides flexibility

Joining and Leaving the Cash Accounting Scheme

You might be wondering how to join the scheme and whether you’re able to leave at any point.

The good news is that the scheme is easy to join if you meet the eligibility criteria. You can join the scheme through HMRC at the beginning of a VAT accounting period.

How to Leave the Scheme

You can leave the VAT Accounting Scheme at any time. The best time to withdraw yourself from the scheme is at the end of a VAT accounting period. If you find that you no longer meet the eligibility criteria, you must leave immediately.

HMRC doesn’t have to be informed if you leave the scheme, but you must report and pay any outstanding VAT payments.

These payments will need to be paid over the following 6 months. However, HMRC states that if your VAT taxable turnover is above £1.35 million in the last 3 months, you will need to pay any money owed right away.