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Cash Accounting Method

The cash accounting method for VAT allows a business to pay and reclaim VAT at the point upon which an invoice is paid, not when the invoice is raised. Cash accounting is preferred amongst smaller businesses as it ensures that the cash is always available to settle any VAT liability with HMRC, conversely any VAT reclaimed must be done so following payment of your supplier invoices.

The cash accounting method has the advantage of mirroring your cash flow so that you are not left with a VAT liability to pay on a large invoice when your client doesn't pay on time.

So to summarise:
  • You pay VAT on your sales when your customer has paid you.
  • You reclaim VAT on your purchase when you have paid your supplier


You must be VAT Registered to use the cash accounting method and your estimated taxable turnover must not exceed GBP 1.35 million (Feb 2016) in the next 12 months.


There are certain exceptions to using the cash accounting scheme. You can't use the cash accounting scheme if:
  • You are on the Flat Rate VAT scheme. The Flat Rate scheme has it's own method of calculating VAT on taxable cash based turnover.
  • You fall behind with your VAT returns or payments to HMRC
  • You've committed a VAT offence in the last 12 months

You cannot use cash accounting on individual transactions where:
  • You have invoices with a payment term that exceeds 6 months.
  • You raise the invoice in advance of payment
  • You are selling goods on a hire purchase agreement or deferred credit scheme
  • Importing goods from within the EU
  • Moving goods outside of a customs warehouse

You must notify HMRC should your business circumstances dictate that you are no longer eligible on the above grounds. You must leave the cash based scheme imediately if your taxable turnover exceeds GBP 1.6 million.

To discuss the viability of being on the cash based VAT scheme always speak to your accountant. --Latest--