VAT cash accounting scheme: when to use it and eligibility rules
Summary
Updated April 2026 — Sources: HMRC VAT Notice 731, GOV.UK VAT cash accounting.
The VAT cash accounting scheme lets eligible businesses account for VAT based on payments received and made, rather than invoice dates. It improves cashflow for businesses with payment delays.
1. Standard vs cash accounting
| Event | Standard | Cash accounting |
|---|---|---|
| Invoice issued | Output VAT due | No VAT yet |
| Payment received | Already accounted | Output VAT due now |
| Supplier invoice | Input VAT reclaimable | Not yet |
| Supplier paid | Already reclaimed | Input VAT reclaimable now |
2. Eligibility and exit
Join if estimated taxable turnover is £1.35 million or less. Must leave at £1.6 million. Cannot use alongside VAT flat rate scheme. Cannot reclaim input VAT on unpaid supplier invoices if you switch from standard to cash accounting.
3. Bad debt relief
Under cash accounting, if a customer never pays, you never accounted for the output VAT — so no bad debt relief claim is needed. Under standard accounting, you must reclaim VAT on debts over six months old.
4. Example
You invoice £12,000 (including £2,000 VAT) in March but receive payment in May. Standard accounting: VAT due in Q1 (March quarter). Cash accounting: VAT due in Q2 (May quarter). Three-month cashflow benefit.
5. Sources
FAQ
What is VAT cash accounting?
You account for VAT on the date you receive payment from customers and pay VAT on purchases when you pay suppliers. This differs from standard accounting based on invoice dates.
Who can use cash accounting?
Businesses with estimated VAT taxable turnover up to £1.35 million. You must leave the scheme once turnover exceeds £1.6 million.
What is the main advantage?
Cashflow alignment — you do not pay VAT to HMRC until your customers pay you. This helps businesses with slow-paying clients or seasonal cashflow patterns.