Debitoor Dictionary

Accounting terms explained simply

Cash Accounting VAT Scheme - What is the VAT Cash Accounting Scheme?

The Cash Accounting VAT Scheme is a method of reporting VAT whereby VAT is recorded on the basis of payments made or recieved.

With Debitoor invoicing software, you can create up-to-date VAT reports in a matter of seconds. Try Debitoor free for 7 days.

The VAT Cash Accounting Scheme follows the principles of cash accounting, meaning that income is recorded when it is received and expenses are recorded in the period they are paid.

The Cash Accounting VAT Scheme therefore differs from the Standard VAT Accounting Scheme, under which VAT is recorded on the date of issuing or receiving a VAT invoice, regardless of when (or if) the payment is made.

Can I use the VAT Cash Accounting Scheme?

To use the Cash Accounting VAT Scheme, your business must:

  • Be registered for VAT.
  • Have an estimated taxable turnover of less than £1.35 million over the next 12 months – VAT taxable turnover includes everything you sell that is not exempt from VAT. If you register for the scheme with a turnover of less than £1.35 million, you can continue to use the Cash Accounting VAT scheme until your taxable turnover reaches £1.6 million.

You are not allowed to use the VAT Cash Accounting Scheme if:

  • You are behind on your VAT Returns or have outstanding VAT payments.
  • You have committed a VAT offence in the last 12 months, such as VAT tax evasion.

Furthermore, the Cash Accounting Scheme cannot be used for certain transactions. For example:

  • Transactions with payment terms longer than six months.
  • Goods which are imported from within the EU.
  • Goods which are moved outside of a customer's warehouse.
  • VAT invoices which have been raised in advance.

Unlike when you join the Flat Rate VAT Scheme, you do not need to inform HMRC when you join the Cash Accounting VAT scheme. However, you must join at the start of a new VAT accounting period. Similarly, if you leave the scheme, you must do so at the end of the accounting period and pay HMRC any outstanding VAT within six months.

Pros and cons of the Cash Accounting VAT Scheme

For many businesses, the Cash Accounting VAT scheme improves cash flow as you do not pay VAT until you recieve payment and, unlike the Standard VAT Accounting Scheme, the Cash Accounting Scheme does not require business to pay VAT on invoices which do not get paid.

This is particularly helpful if you have many customers who regularly pay late, or if you experience a lot of ‘bad debt' from customers who don't pay invoices.

However, the Cash Accounting VAT scheme is less likely to benefit your business if you get paid instantly, or if you regularly reclaim more VAT than you pay.

The VAT Cash Accounting Scheme also means that you cannot reclaim VAT on purchases until you have actually paid the supplier, which can be problematic for businesses which buy a lot of stock on credit.

Cash Accounting VAT Scheme and Debitoor

With Debitoor invoicing software, its easy to stay on top of your VAT. When you activate VAT in your account settings, you can apply VAT to your invoices and expenses and generate automatic VAT reports monthly, quarterly and annually.