What is VAT Cash Accounting Scheme?

Full Definition

Under standard VAT accounting, a business must pay output VAT to HMRC based on the date an invoice is issued, regardless of whether the customer has actually paid -- meaning a business can find itself paying VAT on sales it has not yet been paid for. The VAT Cash Accounting Scheme changes this by allowing eligible businesses to account for output VAT only when payment is actually received from customers, and to reclaim input VAT only when payment is actually made to suppliers. A business can join the scheme if its expected VAT-taxable turnover for the next 12 months is £1.35 million or less, and must leave the scheme once turnover exceeds £1.6 million (businesses can continue using it until turnover exceeds this higher threshold, giving some headroom before compulsory exit). The scheme is optional and can be joined or left at the start of any VAT period without needing to notify HMRC in advance, though records must clearly show the switch to avoid VAT being accounted for twice or missed entirely. The main benefit is improved cash flow, since VAT is never paid to HMRC before the corresponding sale has actually been paid for, and the scheme automatically provides relief for bad debts -- if a customer never pays an invoice, no output VAT is ever due on it, avoiding the need for a separate bad debt relief claim under standard accounting. The main drawback is a delay in reclaiming input VAT on purchases, since a business must wait until it has paid its supplier before recovering the VAT, which can be a disadvantage for businesses that receive extended credit terms from suppliers. The scheme cannot be used alongside the VAT Flat Rate Scheme, which has its own built-in cash-based turnover test, and is not available for businesses more than one month in arrears with VAT returns or that have committed a VAT offence in the past 12 months.

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