VAT Cash Accounting Scheme: pay VAT when customers pay you

Under normal VAT accounting, a business can owe output VAT before the customer has paid the invoice. The Cash Accounting Scheme changes that timing: eligible businesses generally account for VAT on sales when customers pay and reclaim input VAT when suppliers are paid.

The entry threshold is £1.35 million of estimated VAT-taxable turnover

GOV.UK says a VAT-registered business can normally join the Cash Accounting Scheme if estimated VAT-taxable turnover for the next 12 months is £1.35 million or less and the other conditions are met.

The business must leave if taxable turnover exceeds £1.6 million under the scheme's rules. Monitor turnover during growth rather than waiting until the accountant notices after year end.

Output VAT follows customer payment rather than invoice date

The scheme lets the business account for VAT on sales based on payments actually received. This can improve cash flow where customers take 30, 60 or 90 days to pay because the business does not generally fund output VAT before the cash arrives.

Reconcile customer receipts carefully, including part payments. If a customer pays half an invoice, only the corresponding portion enters the cash-accounting VAT calculation under the scheme rules.

Input VAT is delayed until the supplier is paid

The benefit has a mirror image: the business normally cannot reclaim VAT on purchases until it has paid the supplier. A company with long customer terms and fast supplier payment can benefit, while a business that is usually owed VAT may find the scheme less attractive.

Accounts payable and VAT reporting therefore need to share payment status. A supplier invoice in the accounting system is not enough to reclaim the VAT if the bank payment has not yet happened.

Some transactions must stay on normal VAT accounting

GOV.UK lists exclusions, including certain invoices with payment terms of six months or more, advance invoices, some hire purchase and credit-sale arrangements and specified import or warehouse transactions. The scheme cannot simply be applied to every transaction without review.

Flag excluded transaction types in the accounting software. A mostly cash-accounting business still needs to know which invoices follow ordinary tax-point rules.

The business normally joins at the start of a VAT accounting period without a separate HMRC application

GOV.UK says an eligible business joins the scheme at the beginning of a VAT accounting period and does not normally need to tell HMRC that it is using cash accounting. The accounting records still need to make the choice clear.

Do not apply the scheme retrospectively. HMRC's 2026 tertiary legislation explicitly states that retrospective application is not allowed. Decide before the period begins and configure software accordingly.

Bank reconciliation becomes central to VAT accuracy

Because VAT follows payments, the bank and cash records directly affect the VAT return. Match customer receipts and supplier payments to invoices, including card settlements, cash and part payments.

Unallocated bank receipts can create tax errors if they remain unresolved at quarter end. Run reconciliation before preparing the VAT return and keep a schedule of cash-accounting transactions that explains the reported figures.

Worked example: a business invoices a customer £12,000 including £2,000 VAT on 20 June but receives payment on 15 August. Under normal invoice accounting, the VAT can fall into the earlier return; under Cash Accounting, the output VAT generally follows the August receipt. That can materially improve working capital for firms with long payment terms.

The reverse applies to suppliers. If the business receives a £6,000 invoice including £1,000 VAT in June but pays in September, the input VAT is generally delayed until payment. Model both sides before deciding that Cash Accounting always improves liquidity.

When leaving the scheme, HMRC requires outstanding VAT to be brought into account under the transition rules, with up to six months available in many cases. Build that exit liability into cash forecasts before turnover growth forces the business out.

Use customer- and supplier-level ageing alongside bank data. Cash Accounting can make VAT more closely follow liquidity, but it also means overdue debtors postpone output VAT while overdue supplier balances postpone input-VAT recovery. Management should see whether the scheme is helping because customers pay slowly or hurting because the business itself delays supplier payment.

When software imports bank feeds automatically, review unmatched receipts before filing. A customer payment left in suspense can cause output VAT to be omitted from the return even though the cash is already in the account. Cash Accounting reduces one timing problem only if reconciliation remains accurate.