Pillar Guide · Updated July 2026
The VAT Cash Accounting Scheme: A Complete UK Guide for 2026/27
The VAT Cash Accounting Scheme lets eligible small businesses account for VAT based on money actually received and paid, rather than on invoice dates, which can significantly smooth cash flow. This guide explains who can join, how it compares to standard accrual-based VAT accounting, its built-in bad debt protection, and how to join or leave the scheme.
What the Scheme Is
Under standard VAT accounting, a business must account for output VAT on sales when it issues an invoice and reclaim input VAT on purchases when it receives an invoice, regardless of when payment actually changes hands. The Cash Accounting Scheme changes this so that VAT is instead accounted for when money is actually received from customers or paid to suppliers, which can better match a business's VAT bill to its real cash position.
Who Can Join
A VAT-registered business can generally join the Cash Accounting Scheme if its expected taxable turnover for the next 12 months is £1.35 million or less, and it is up to date with its VAT returns and payments. Businesses already using the Flat Rate Scheme cannot also use Cash Accounting, since the Flat Rate Scheme has its own built-in cash-based version.
How It Works in Practice
Once on the scheme, a business includes a sale in its VAT return for the period in which it actually receives payment from the customer, rather than the period in which it raised the invoice, and similarly reclaims input VAT on a purchase only once it has actually paid the supplier. This applies automatically to all sales and purchases while using the scheme, without needing to elect it transaction by transaction.
The Cash-Flow Benefit
The main advantage is cash flow: a business does not have to hand over VAT on a sale to HMRC before it has actually collected the money from the customer, which is particularly valuable for businesses that offer extended payment terms or experience frequent late payment. Businesses that are paid quickly by customers but take longer to pay their own suppliers may find less benefit, or even a slight disadvantage, compared with standard accounting.
Automatic Bad Debt Relief
Because output VAT is only ever due once payment is received, a business using Cash Accounting effectively never has to pay VAT on a sale that is never paid for at all, giving automatic protection against bad debts without needing to separately claim bad debt relief after waiting the usual six-month period required under standard accounting.
Limitations and Drawbacks
The scheme delays reclaiming input VAT on purchases until the business has actually paid its suppliers, which can be a disadvantage for businesses that buy on generous credit terms, since they would have reclaimed that VAT sooner under standard accounting. It is also not available for VAT due under the reverse charge or on the acquisition of goods from other countries in certain circumstances, and record-keeping needs to clearly track actual payment dates rather than invoice dates.
Combining with Other VAT Schemes
Cash Accounting can be combined with the Annual Accounting Scheme, allowing a business to submit one VAT return a year while still accounting for VAT on a cash basis, which further simplifies administration for small, steady businesses. It cannot, however, be combined with the Flat Rate Scheme, which already uses a cash-based turnover figure by design.
How to Join or Leave
A business can start using Cash Accounting at the beginning of any VAT accounting period without needing to notify HMRC in advance, provided it meets the eligibility criteria, simply by starting to account for VAT on a cash basis from that period onward. A business must leave the scheme if its taxable turnover in the previous 12 months exceeds £1.6 million, and can also choose to leave voluntarily at the end of any VAT period.