The VAT cash accounting scheme

What is the VAT cash accounting scheme?

Usually the VAT a business pays to HMRC is the difference between its sales invoices and its purchase invoices, and it has to report these figures and pay HMRC even if the invoices have not been paid. With the Cash Accounting Scheme, a business pays VAT on its sales when its customers pay it, and reclaims VAT on its purchases when it has paid its supplier. ^[1]

The rules are set out in regulations 56 to 65 of the VAT Regulations 1995, and HMRC explains them in VAT Notice 731. ^[4]

Who can use the scheme?

A business can use cash accounting if it is registered for VAT and its estimated VAT taxable turnover is £1.35 million or less in the next 12 months. VAT taxable turnover is the total of everything sold that is not VAT exempt. ^[2]

A business cannot use it if it uses the VAT Flat Rate Scheme, if it is not up to date with its VAT returns or payments, or if it has committed a VAT offence in the last 12 months, for example VAT evasion. ^[2]

It must leave the scheme if its VAT taxable turnover is more than £1.6 million. ^[2]

Which transactions are excluded?

Some transactions have to be accounted for under the standard method even inside the scheme. GOV.UK lists these: ^[2]

• where the payment terms on a VAT invoice are 6 months or more
• where a VAT invoice is raised in advance
• goods bought or sold under lease purchase, hire purchase, conditional sale or credit sale
• importing goods into Northern Ireland from the EU
• moving goods outside a customs warehouse

HMRC's notice adds that the scheme has to be used for the whole of a VAT-registered business, subject to these exceptions. ^[4]

How does it change the VAT return?

The return keeps its usual boxes. For a business on cash accounting, the figures in boxes 1, 4, 6 and 7 are based on payments received and made instead of invoices issued and received. Box 1 (VAT due on sales) uses the payments a business has had, and box 4 (input VAT) uses the payments it has made. All other boxes are filled in as normal. ^[5]

When might the scheme help, and when might it not?

HMRC says the scheme could help cash flow, as generally a business does not have to pay VAT to HMRC until its customer has paid it. This is most relevant if it gives customers extended credit or suffers a lot of bad debts. ^[4]

HMRC also lists cases where the scheme may give no benefit: when a business is usually paid as soon as it makes a sale, when it often reclaims more VAT than it pays, and when it makes continuous supplies of services. ^[4]

There is a trade-off on the purchase side. Under the standard method a business can reclaim VAT on a purchase as soon as it has a VAT invoice, even if it has not paid. Under cash accounting it can only reclaim once it has paid the supplier. ^[4] Input VAT is explained in the guide to input VAT and output VAT.

GOV.UK recommends talking to an accountant or tax adviser about whether the scheme is right for a business. ^[1] A review of VAT return support could help identify whether the scheme may suit your business.

How do I join or leave?

A business joins at the beginning of a VAT accounting period and does not have to tell HMRC it uses cash accounting. ^[3]

It can leave at any time and should leave at the end of a VAT accounting period. It must leave if it is no longer eligible. It does not have to tell HMRC, but it must report and pay any outstanding VAT whether or not customers have paid, and it can report and pay this over 6 months. If its VAT taxable turnover exceeded £1.35 million in the last 3 months it must report and pay straight away. ^[3]

Because HMRC does not need to be told, the way to check whether a company uses the scheme is to look at how its VAT records and returns are prepared, or ask whoever prepares them.

How is it different from other VAT schemes and from the cash basis?

The VAT Flat Rate Scheme can be joined with turnover of £150,000 or less. The Annual Accounting Scheme has the same £1.35 million joining threshold as cash accounting. These are separate schemes with their own rules. ^[8]

The cash basis that GOV.UK describes for Income Tax is a different thing. It is the standard way for sole traders and partnerships to record income and expenses, and limited companies cannot use it. ^[7]

What are the three types of VAT, and what is the rate?

There are three VAT rates. The standard rate is 20% for most goods and services, the reduced rate is 5% for some goods and services, and the zero rate is 0%. ^[6] GOV.UK shows the standard rate as 20% as at 11 October 2026. Rates can change, so check GOV.UK for the current figure. ^[6]