VAT Cash Accounting Scheme: Pay VAT Only When You Get Paid (2026 Guide)

What is the VAT Cash Accounting Scheme?

On standard VAT accounting, you owe HMRC the VAT on a sale the moment you raise the invoice, even if the customer hasn’t paid a penny. The Cash Accounting Scheme changes that timing. You account for VAT on your sales when the money reaches you, and you reclaim VAT on your purchases when you pay your suppliers. In short, the VAT follows the cash, not the paperwork.

Who can join the scheme?

You can use cash accounting if:

• you are VAT-registered
• you expect your VAT taxable turnover for the next 12 months to be £1.35 million or less
• you are up to date with your VAT returns and payments

You must leave the scheme once your VAT taxable turnover goes above £1.6 million a year. You also can’t join if you’ve committed a VAT offence, such as VAT evasion, in the last 12 months, or if you use the Flat Rate Scheme.

How it helps your cash flow

This is the main reason smaller businesses join. On standard accounting you can end up paying HMRC the VAT on an invoice weeks or months before the customer settles it, which means funding that VAT out of your own account in the meantime. Cash accounting removes that gap. The VAT only leaves your account once the money has landed in it.

For anyone who invoices on credit terms and waits 30, 60 or even 90 days to be paid, that timing difference can be the difference between a steady month and a scramble.

The quieter benefit: built-in bad debt relief

There’s a second advantage that’s easy to overlook. If a customer never pays you, you never receive the money, so you never owe HMRC the VAT on that sale. On standard accounting you’d have to pay the VAT first and claim it back later through a separate bad debt relief claim. With cash accounting, that protection is automatic.

When the scheme works against you

The timing cuts both ways, and this is the part most guides skip over. You also can’t reclaim the VAT on your purchases until you’ve actually paid your suppliers. That makes cash accounting a poor fit for some businesses:

• If you usually reclaim more VAT than you pay. A repayment business, for example one making mostly zero-rated sales, would see its refunds delayed.
• If your customers pay you straight away but you buy on credit. A shop taking payment at the till but buying stock on 30-day terms is better off on standard accounting, which lets it reclaim purchase VAT sooner.
• If you’re about to buy costly equipment on credit. You’d have to wait until you’ve paid before reclaiming the VAT.

Sales that stay on the normal rules

Even once you’re on the scheme, some transactions still follow the standard invoice-based rules:

• hire purchase, lease purchase and conditional sale agreements
• importing goods into Northern Ireland from the EU, and moving goods out of a customs warehouse
• VAT invoices raised in advance
• VAT invoices with payment terms of 6 months or more
• sales and purchases under the VAT domestic reverse charge, such as construction services

You also can’t run cash accounting alongside the Flat Rate Scheme, which has its own cash-based method, so it’s one or the other. If you’re weighing up your options, start with our guide on Flat Rate vs Standard VAT.

A worked example

Say you invoice a customer £10,000 plus £2,000 VAT on 1 June, and they finally pay you on 15 August.

• On standard accounting, the £2,000 is due on your June return. You hand it to HMRC in the summer, before the customer has paid you.
• On cash accounting, the £2,000 falls into the return covering August, when the money actually arrived. And if that customer never pays at all, you never owe the £2,000 in the first place.

Your VAT return on cash accounting

You file the same nine-box VAT return, but the figures follow the money, not the invoices:

• Box 1: the VAT on payments you received from customers in the period.
• Box 4: the VAT on payments you made to suppliers in the period.
• Box 6: the value, before VAT, of the payments you received.
• Box 7: the value, before VAT, of the payments you made.

Record the date each invoice is paid and match each payment to its invoice. A part payment is treated as including VAT, so at 20% the VAT is one-sixth of the amount paid, and payments are allocated to invoices in the order they were issued. Transactions outside the scheme, such as hire purchase or invoices raised in advance, go on the return in the normal way, by invoice date.

How to join, and how to leave

Joining is straightforward. You don’t apply or notify HMRC. If you qualify, you simply start using cash accounting from the beginning of a VAT period. Keep your normal VAT records, plus a clear way to match each payment to the invoice it relates to. Your returns are still filed digitally, so it works alongside filing VAT returns through Making Tax Digital.

You can leave at any time, and you must leave if you are no longer eligible, for example because your turnover has gone over £1.6 million. HMRC advises leaving at the end of a VAT period, and you do not need to tell it. When you leave, you must account for the VAT on all outstanding invoices, whether or not your customers have paid. You can usually spread that over 6 months, but you must pay it straight away if your turnover went over £1.35 million in the last 3 months, or if HMRC has withdrawn your use of the scheme. Keep an eye on your VAT return deadlines so a change of scheme never leads to a late return.

Is it right for your business?

As a rough guide, cash accounting suits you if you’re under £1.35 million, you invoice on credit terms, you’re often paid late, and most of your sales are standard-rated. It’s less useful if you tend to reclaim more VAT than you pay, you’re paid up front but buy on credit, or you make large one-off purchases on account.

Getting your VAT right

The Cash Accounting Scheme is one of the simplest ways for a smaller business to keep more cash in hand, as long as it fits how you buy and sell. Record payment dates carefully, and if you work from spreadsheets, MTD VAT bridging software files your return without full accounting software.

For the latest rules, check the official GOV.UK guidance: VAT Cash Accounting Scheme eligibility and VAT Notice 731.

Disclaimer: This guide is general information, not tax advice. Whether cash accounting suits your business depends on your exact circumstances. Always check the latest HMRC guidance or speak to a qualified adviser before changing how you account for VAT.