UK VAT Cash Accounting Scheme: Complete Guide

By Sharon Gillespie published: May 18, 2025

The VAT Cash Accounting Scheme offers UK businesses a more cash flow-friendly approach to managing VAT obligations. Instead of paying VAT when you raise invoices, you only pay when customers actually pay you. This guide covers everything you need to know about eligibility, benefits, and how the scheme works in 2025.

What is the VAT Cash Accounting Scheme?

The VAT Cash Accounting Scheme allows eligible businesses to account for VAT based on when payments are actually received and made, rather than when invoices are issued. This differs from standard VAT accounting, where VAT is due regardless of whether customers have paid their invoices.

Under this scheme:

• Output VAT (VAT on sales) is only due when customers pay you
• Input VAT (VAT on purchases) can only be reclaimed when you pay your suppliers

Eligibility Requirements

To join the VAT Cash Accounting Scheme, your business must meet specific criteria:

Turnover Thresholds

• Your estimated VAT taxable turnover for the next 12 months must be £1.35 million or less
• You can remain on the scheme until your annual VAT taxable turnover exceeds £1.6 million
• VAT taxable turnover includes zero-rated items but excludes VAT-exempt goods and services

Additional Eligibility Criteria

You cannot use the Cash Accounting Scheme if:

• You use the VAT Flat Rate Scheme (which has its own cash-based method)
• You’re not up to date with your VAT returns or payments
• You’ve committed a VAT offence in the last 12 months (such as VAT evasion)

Key Benefits

Improved Cash Flow

The primary advantage is significantly improved cash flow management. You only pay VAT to HMRC when you’ve received payment from customers, eliminating the need to fund VAT payments on unpaid invoices.

No Bad Debt VAT Issues

If a customer doesn’t pay their invoice, you don’t owe VAT to HMRC on that sale. This eliminates the need for bad debt relief claims, which under standard VAT accounting can only be claimed on debts over six months old.

Simplified Bad Debt Management

Since VAT is only due when payment is received, non-payment automatically means no VAT liability, simplifying your accounting processes.

How It Works: Practical Example

This three-month delay can significantly improve cash flow, especially for businesses with extended payment terms.

Restrictions and Limitations

Transaction Exclusions

You must use standard VAT accounting for:

• Invoices with payment terms of 6 months or more
• VAT invoices issued in advance
• Lease purchase, hire purchase, conditional sale, or credit sale transactions
• Imports from within the European Union
• Goods moved out of a customs warehouse

Input VAT Timing

While you benefit from delayed output VAT, you can only reclaim input VAT when you’ve actually paid your suppliers. If you pay bills promptly while customers pay slowly, this timing difference maximizes the cash flow benefit.

Joining the Scheme

Simple Process

• No notification required: You don’t need to tell HMRC you’re using the Cash Accounting Scheme
• Start date: Join at the beginning of any VAT accounting period
• Immediate effect: Benefits apply from your chosen start date

Prerequisites

Ensure you meet all eligibility requirements before joining, particularly the £1.35 million turnover threshold for the coming 12 months.

Leaving the Scheme

When You Must Leave

You must leave the scheme if:

• Your VAT taxable turnover exceeds £1.6 million in any 12-month period
• You no longer meet the eligibility criteria
• HMRC withdraws your use of the scheme

Leaving Process

• No notification required: You don’t need to tell HMRC you’ve stopped using the scheme
• End date: Leave at the end of a VAT accounting period
• Outstanding VAT: You must pay all outstanding VAT, whether customers have paid or not

Payment Options

When leaving the scheme, you can:

• Pay all outstanding VAT immediately, or
• Spread payments over 6 months (unless your turnover exceeded £1.35 million in the last 3 months, in which case immediate payment is required)
• Pay immediately if HMRC has written to withdraw your use of the scheme

Who Benefits Most?

The Cash Accounting Scheme is particularly beneficial for:

Service-Based Businesses

Companies providing services often experience delays between invoicing and payment, making the cash flow benefits particularly valuable.

Businesses with Extended Payment Terms

If your customers typically take 30-90 days to pay, the scheme can provide significant cash flow relief.

Growing Businesses

Companies approaching the VAT registration threshold can benefit from improved cash flow management during periods of growth.

Compatibility with Other Schemes

Cannot Combine With

• VAT Flat Rate Scheme: These schemes are mutually exclusive
• Partial exemption: May complicate the cash accounting benefits

Can Combine With

• VAT Annual Accounting Scheme: Can be used together for maximum administrative simplification
• Making Tax Digital: Fully compatible with MTD requirements

Record-Keeping Requirements

Maintain the same VAT records as standard accounting, but track:

• Dates when payments are received from customers
• Dates when payments are made to suppliers
• Clear separation between invoiced amounts and actual cash receipts/payments

Is It Right for Your Business?

Consider the VAT Cash Accounting Scheme if you:

• Experience regular delays in customer payments
• Want to improve cash flow management
• Prefer simpler bad debt management
• Meet the eligibility requirement of less than £1.35 million turnover in the last 12 months

The scheme may not be suitable if you:

• Pay suppliers immediately but receive customer payments quickly
• Use the VAT Flat Rate Scheme
• Have significant transactions excluded from cash accounting

Conclusion

The VAT Cash Accounting Scheme offers valuable cash flow benefits for eligible businesses, particularly those facing delays in customer payments. With no notification requirements for joining or leaving and compatibility with most other VAT arrangements, it provides flexibility alongside improved financial management.

Consider consulting with a tax advisor to determine whether the Cash Accounting Scheme aligns with your business model and cash flow requirements, especially if you’re approaching the eligibility thresholds.