VAT Cash Accounting Scheme

When a business registers for VAT, two of the VAT schemes you can choose are the cash scheme and the accrual scheme.

As a business, it is important to decide which scheme you are going to choose upon registering for VAT, as this will have an effect on the cash flow of the business. It is also important to monitor if this initial decision is still appropriate as the business grows and changes.

The two schemes record transactions on the VAT return differently.

  • With the accrual scheme, you pay and reclaim VAT when you invoice customers and are invoiced by suppliers
  • With the cash scheme, you pay and reclaim VAT when you are paid by customers and pay your suppliers

Eligibility for the VAT Cash Accounting Scheme

  • You can join the scheme if your estimated taxable turnover is less than £1.35 million in the next year
  • Taxable turnover includes standard-, lower- and zero-rated VAT supplies, but does not include exempt supplies
  • When you are on the cash scheme, if your taxable turnover over a 1-year period reaches more than £1.6 million you need to leave the cash scheme at the end of the VAT accounting period. You must review this at the end of each VAT period
  • You are not on the flat rate VAT scheme, as this scheme has its own cash-based scheme
  • You have no VAT returns outstanding and do not owe HMRC any money

There are a couple of specific transactions that would not be eligible to be accounted for under the cash VAT scheme:

  • Where the terms for a VAT sales invoice is more than 6 months
  • Where you are buying/selling goods under hire purchase or lease purchase agreements

Benefits of the VAT Accrual Accounting Scheme

  • If you have short credit terms with customers, and long credit terms with suppliers, it would be preferable to be on the accrual scheme as you would be able to reclaim the VAT on your purchases quicker
  • Small businesses may have higher expenditure in their first years while setting up the business, and therefore will want to reclaim the VAT as soon as possible to help with cash flow, which the accrual scheme allows

Benefit of the VAT Cash Accounting Scheme

  • If you receive money from customers a long time after you raise the invoice, you may be paying the VAT to HMRC before you receive the money from your customer, which can cause cash flow issues especially if you are a small business with limited cash. By using the cash scheme you avoid this as you only pay the VAT to HMRC after you have received the money from your customers
  • For bad debts, under the accrual scheme you will have paid the VAT to HMRC and can reclaim the VAT back after 6 months of the invoice being overdue. However under the cash scheme, you will never pay the VAT to HMRC as you will not receive the money, which is better for cash flow
  • Most people find it easier to keep track of the VAT owed to HMRC when thinking about cash received and spent, instead of the invoice dates on sales and purchases

Leaving and joining the VAT Cash Accounting Scheme

  • You do not have to tell HMRC when choosing to join the cash scheme
  • You must be eligible to join the cash scheme and join at the beginning of a VAT period
  • To leave the cash scheme you should leave at the end of a VAT quarter, and you do not need to tell HMRC you are leaving the scheme either
  • When you leave the cash scheme you would need to pay HMRC all of the VAT on invoices that are owed to you by customers

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