VAT Cash Accounting Scheme: Eligibility, Bad Debt Relief, and Records

The VAT Cash Accounting Scheme lets a VAT-registered business with taxable turnover of £1.35 million or less account for VAT based on when payments actually move, not when invoices are issued.¹ You owe HMRC output tax only after a customer has paid you, and you reclaim input tax only after you’ve paid your supplier. For businesses that wait weeks or months to be paid, that keeps VAT bills in step with the bank balance instead of forcing you to fund HMRC out of money you haven’t yet collected.

Who Can Use It

You qualify if your estimated VAT taxable turnover for the next 12 months is £1.35 million or less.² Taxable turnover means the total value of everything you sell that isn’t VAT exempt. You also need to be registered for VAT and up to date with your returns and payments.

HMRC will refuse you if you’ve committed a VAT offence such as evasion in the last 12 months. You also can’t use cash accounting alongside the Flat Rate Scheme, which has its own cash-based turnover method built in.² The Annual Accounting Scheme is a different matter and can run alongside cash accounting; the two do different jobs, one changing when you file and the other changing when transactions are recognised.

How It Works

There’s no application form and no approval from HMRC. You simply start using cash accounting at the beginning of your next VAT period.¹ From that point, output tax goes on the return for the period you receive payment, and input tax goes on the return for the period you pay a supplier. Your quarterly figures flow from money in and out of the bank rather than from invoice dates.

The switch itself needs care. Any invoices you already reported under the old accrual method must not be reported again when payment lands under cash accounting. Mark the changeover date in your records and go through outstanding invoices so nothing gets counted twice.

When a Payment Counts as Received

The “payment date” depends on how the money moved, and HMRC sets specific rules:³

Credit or debit card: the date you make out the sales voucher, not the date the card company settles with you. VAT is triggered at the point of sale even though the money arrives later.
Standing order or direct debit: the date your bank account is credited for a sale, or debited for a purchase.
Cheque: the date you receive the cheque, not the date it clears.

The same logic runs in reverse on purchases. A card purchase counts as paid when the voucher is made out; a direct debit counts when your account is debited.

For a partial payment or deposit, account for VAT on the amount you actually receive in that period. Returnable deposits are the exception: no VAT until the deposit is applied to the final invoice or kept.⁴

Transactions You Still Can’t Include

Some supplies stay on standard VAT rules even when you’re on the scheme:³

Any supply where the invoice isn’t due to be paid in full within six months of the date it was issued.
Any supply where a VAT invoice is raised before the goods or services are provided.
Goods sold or bought under hire purchase, lease purchase, conditional sale, or credit sale, which follow the normal tax point rules.⁴
Imports, acquisitions from an EU member state business, and removals from a customs warehouse. The onward sale of those goods, once they’re in your possession, can go on the scheme.
Goods moving into Northern Ireland from the EU, which stay on invoice-based reporting.²

Continuous services such as ongoing maintenance contracts aren’t excluded, but HMRC notes the scheme may give little benefit there because invoicing and payment tend to line up closely already. If it isn’t helping, you can drop it at the end of a VAT period.³

The Bad Debt Advantage

This is where the scheme earns its keep for many small businesses. Under standard VAT accounting, if a customer never pays, you’ve already handed the output tax to HMRC and have to reclaim it through a formal bad debt relief claim, with its own conditions and waiting periods. Under cash accounting the problem doesn’t arise. Because VAT only becomes due when you receive payment, an unpaid invoice never creates a VAT liability in the first place.⁵ If slow or unreliable customers are a regular feature of your trade, that automatic protection is often the deciding factor.

Records

Records must cross-reference every payment to normal commercial evidence such as bank statements, cheque stubs, and paying-in slips.³ Each entry should show the date the payment was received or made, the amount in sterling, and the name of the customer or supplier. All VAT-registered businesses also have to keep records digitally and file returns using compatible software under Making Tax Digital, whichever accounting method they use.⁶

Leaving the Scheme

You must leave once your VAT taxable turnover passes £1.6 million.² You can also stop voluntarily at the end of any VAT period if it no longer suits the business, with no need to notify HMRC.

When you leave, you need to account for VAT on everything you’ve supplied but not yet been paid for, and you can reclaim input tax on purchases you haven’t paid for under the normal rules.³ Two options exist. You can settle everything in your final period on the scheme, or spread the outstanding amount over the following six months. You don’t have to tell HMRC which you’re using. The six-month option is closed off if HMRC withdrew the scheme from you, or if your turnover has topped £1.6 million and your sales in the previous three months exceeded £1.35 million. In those cases the full amount is due immediately.

1
GOV.UK. VAT Cash Accounting Scheme
2
GOV.UK. VAT Cash Accounting Scheme: Eligibility
3
GOV.UK. Cash Accounting Scheme (VAT Notice 731)
4
GOV.UK. VAT: Instalments, Deposits, Credit Sales
5
GOV.UK. Relief from VAT on Bad Debts (VAT Notice 700/18)
6
GOV.UK. VAT Notice 700/22: Making Tax Digital for VAT