Key takeaways
- Cash Accounting VAT Scheme is a beneficial alternative accounting method for small businesses with taxable turnover below £1.35 million, allowing them to improve cash flow and reclaim input tax when suppliers have been paid.
- Eligibility criteria, joining/leaving rules, calculations of payments & transactions excluded must be adhered to in order to comply with HMRC regulations.
- Combining the Cash Accounting Scheme with other schemes can help manage bad debts and unpaid invoices.
In short: The UK Cash Accounting VAT Scheme lets you pay VAT to HMRC when your customers pay you, not when you send the invoice. You reclaim input tax once you have paid your suppliers. You can join if your VAT taxable turnover is £1.35 million or less. The scheme helps cash flow and cuts VAT admin.
Is there a more cash-friendly way to handle your Value-Added Tax (VAT) as a small business owner? The Cash Accounting VAT Scheme is an alternative to the standard invoice-based method. It can improve your cash flow and reduce the time you spend on VAT accounting.
In this post, we compare the scheme with standard VAT accounting. We also cover who is eligible and how the scheme affects different parts of your business. Read on to find out if the Cash Accounting VAT Scheme is right for you.
What is the Cash Accounting VAT Scheme?
The VAT Cash Accounting Scheme is a VAT accounting method where you pay VAT when your customers pay you, not when you invoice them. Under the scheme, you can:
- Pay VAT when payments are actually received from customers, rather than upon invoicing.
- Improve cash flow, as you only pay VAT when you have the money in hand.
- Reclaim input tax when suppliers have been paid.
The Cash Accounting VAT Scheme suits small businesses that meet the criteria. It improves cash flow and cuts the time spent on VAT accounting. This makes VAT easier to manage for small business owners.
There is one drawback, though. You can only reclaim input tax once you have paid your suppliers.
Who is eligible for the Cash Accounting VAT Scheme?
You are eligible for the Cash Accounting VAT Scheme if your taxable turnover is less than £1.35 million. You must also be free from insolvency and VAT evasion. Under the scheme, you pay VAT to HMRC based on payments you actually receive and make. Invoices issued and received do not set the timing.
There are exceptions, though. Some transactions, such as imports and exports, are not eligible for the Cash Accounting VAT Scheme. You must account for these using normal VAT accounting. This makes sure the right amount of VAT is paid and keeps the VAT system fair.
How do you join and leave the Cash Accounting VAT Scheme?
You join the Cash Accounting VAT Scheme at the start of a VAT accounting period. You leave it at the end of a VAT accounting period, following set rules. When you leave, you must account for all outstanding VAT on supplies you made but have not been paid for. This applies even if your customer has not paid you yet.
The Cash Accounting Scheme helps you manage bad debts and unpaid invoices, because you only account for VAT once you are paid. However, you must keep normal cash accounting records. You must also follow specific rules when you leave the scheme.
How do you calculate VAT under the Cash Accounting Scheme?
Under the Cash Accounting Scheme, you calculate VAT from the payments you actually receive from customers and make to suppliers. Invoices issued and received do not count. You pay VAT on sales when customers pay you. You reclaim VAT on purchases when you pay your suppliers. The scheme lines up your VAT payments with your cash flow, so your VAT bills are easier to manage and predict.
It also means that if you leave the Cash Accounting VAT Scheme, you must account for outstanding VAT on supplies made but not yet paid for. This applies even if your customer has not paid you.
Which transactions are excluded from the Cash Accounting Scheme?
Some transactions cannot use the Cash Accounting Scheme and must use normal VAT accounting instead. These include:
- Supplies where a VAT invoice is issued with payment terms of 6 months or more.
- Supplies subject to the reverse charge mechanism.
- Supplies of goods under certain conditions (imports and exports, for example).
These exclusions make sure the right amount of VAT is paid and keep the VAT system fair. If you use the Cash Accounting Scheme, you need to know these exclusions. Account for them correctly to avoid compliance problems with HMRC.
Can you combine Cash Accounting with other VAT schemes?
Yes, you can combine the Cash Accounting Scheme with the Annual Accounting Scheme, but not with the VAT Flat Rate Scheme. This gives you more flexibility. You can tailor your VAT accounting to suit your needs. For a closer look, see The Annual Accounting Scheme - A Comprehensive Guide.
However, you must follow specific rules when you combine schemes with the Cash Accounting Scheme. Keep your VAT accounting methods aligned and well managed. This helps you get the most from your VAT setup and lowers the risk of compliance problems.
How does Cash Accounting work for VAT groups?
For a VAT group, the Cash Accounting Scheme turnover limit applies to the whole group’s VAT taxable turnover. A VAT group is a set of companies under common control that register together for VAT. No single company in the group is exempt from this rule. If the group’s total taxable turnover is over £1.35 million, the group cannot use the Cash Accounting Scheme.
Make sure you follow all VAT rules to avoid any potential VAT offence. HMRC does not let some companies in a VAT group use cash accounting while others use standard invoice-based accounting. This keeps the VAT group consistent. It also makes VAT easier for businesses and HMRC to manage and monitor. Read more in our guide: What Is a VAT Group and Should You Join One?.
How does the scheme handle bad debts and unpaid invoices?
The Cash Accounting Scheme makes bad debts easier to handle, because you only account for VAT once you are paid. You do not need to account for VAT on bad debts. This is a big advantage over the standard invoice accounting scheme. It makes the Cash Accounting Scheme a more efficient way to handle VAT than the invoice-based method.
When you leave the Cash Accounting Scheme, however, you must account for all outstanding VAT on supplies made but not yet paid for. This applies even if your customer has not paid you. Keep this in mind when deciding to join or leave the scheme, as it could affect your cash flow and VAT bills.
What happens to the Cash Accounting Scheme in insolvency?
In an insolvency, you must account for outstanding VAT under the pre-insolvency rules. You must account for supplies bought and received before the insolvency. Report any outstanding VAT on these supplies on the pre-insolvency VAT returns.
An insolvency practitioner may operate the Cash Accounting Scheme if certain conditions are met. Their role usually includes:
- Cancelling the VAT registration.
- Organising the payment of VAT.
- Making sure all outstanding VAT obligations are properly managed and accounted for during the insolvency.
Can HMRC remove you from the Cash Accounting Scheme?
Yes, HMRC can withdraw your business from the Cash Accounting Scheme if you no longer meet the criteria or if it has compliance concerns. You have the right to challenge the decision. If needed, you can appeal to the First-tier Tribunal (Tax).
If you use the Cash Accounting Scheme, keep in open contact with HMRC. Stay aware of any changes in eligibility or accounting methods. Work closely with HMRC and follow the scheme’s rules. This lowers your risk of compliance problems and keeps a good relationship with the tax authority.
Conclusion
The Cash Accounting VAT Scheme gives small businesses a more cash-friendly way to manage VAT. It improves cash flow and cuts the time spent on VAT accounting. For businesses that meet the criteria, it can be a valuable tool.
That said, you need to know the scheme’s limits, exclusions, and rules for combining it with other VAT schemes. You should also know how it affects different parts of your business. Once you understand how the Cash Accounting VAT Scheme works, you can decide if it is right for your VAT needs.
Do you need help with your VAT compliance? Book a free call with one of our VAT experts to find bespoke solutions for your business, optimize your VAT costs, and reach millions of new potential customers.
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Frequently asked questions
What is cash accounting for VAT?
Cash accounting for VAT allows businesses to pay HMRC based on cash received from customers rather than invoices issued. This is beneficial as it improves cash flow, with businesses only having to pay VAT once their customers have paid them.
This method of accounting is especially useful for small businesses, as it allows them to manage their cash flow more effectively and reduce the risks associated with late payments. It also helps to reduce the administrative burden of keeping records.
What is the cash accounting limit for VAT?
Businesses with an estimated VAT taxable turnover of £1.35 million or less in the next 12 months can use the Cash Accounting Scheme. However, they must leave the scheme if their turnover exceeds the £1.6m threshold at the end of the relevant VAT return period.
This means that businesses must be aware of their turnover and plan accordingly to ensure they're not over the threshold when their VAT return period ends.
What is the main advantage of the Cash Accounting VAT Scheme?
The main advantage of the Cash Accounting VAT Scheme is improved cash flow, as businesses are only required to pay VAT when they receive payments from customers, rather than upon invoicing. Therefore, businesses can keep more of their money in the bank for longer, allowing them to invest in growth and development.
It also reduces the amount of paperwork and administrative burden associated with VAT, as businesses don’t need to keep track of invoices.
