The VAT Cash Accounting Scheme Explained for Small Business…

If your customers pay late but HMRC still wants the VAT on the invoice date, you can end up paying VAT on money you haven't received yet. The VAT Cash Accounting Scheme fixes exactly that.

Under standard (accrual) VAT, you owe HMRC the output VAT on a sale the moment you raise the invoice, whether or not the customer has paid. For a business with slow-paying clients, that timing gap can quietly drain your bank account. The Cash Accounting Scheme lets you flip to a simpler rule: with cash accounting for VAT, you account for the tax on the cash, not the paperwork. This guide explains how cash accounting VAT works in 2026/27, the thresholds, the real benefits, what it leaves out, and who should use it.

What the VAT Cash Accounting Scheme actually does

The scheme changes the timing of when you account for VAT, not how much VAT you ultimately pay. Specifically:

You account for output VAT (the VAT on your sales) only when your customer actually pays you.
You reclaim input VAT (the VAT on your purchases) only when you actually pay your supplier.

Everything is driven by the date cash moves, not the date an invoice is raised. Compare that with standard accrual VAT, where the invoice date (the tax point) decides which VAT quarter a transaction falls into, regardless of who has been paid.

The join and leave thresholds

The scheme is built for smaller businesses, so it has turnover limits:

To join: your estimated VAT taxable turnover for the next 12 months must be £1.35 million or less.
To stay in: you can remain in the scheme until your VAT taxable turnover exceeds £1.6 million, at which point you must leave.

The gap between the two figures is deliberate. It means you don't get tipped out of the scheme the moment you have one good quarter; there's headroom before you have to switch back to accrual accounting.

You don't need to apply

There's no application form and no waiting for HMRC approval. If you're eligible and your VAT affairs are up to date, you simply start using cash accounting at the beginning of a VAT accounting period. You also leave at the end of a VAT period. Keep your usual VAT records, but record the payment dates rather than relying on invoice dates to decide when VAT falls due.

The cash-flow benefit, with a worked example

This is the headline reason most small businesses join. Let's see the difference in pounds.

Imagine you run a consultancy. In a single VAT quarter you invoice three clients for £20,000 plus VAT each. The standard VAT rate is 20%, so each invoice carries £4,000 of output VAT, a total of £12,000 of VAT you've charged. Your only cost in the quarter is £5,000 plus £1,000 VAT for software and subcontractors, which you've paid in full.

By the VAT return deadline, two of your three clients have paid; the third is a notoriously slow payer and hasn't settled their £20,000 + £4,000 VAT invoice.

Under standard accrual VAT:

Output VAT due on all three invoices (paid or not): £12,000
Input VAT reclaimed: £1,000
VAT payable to HMRC: £11,000 — including £4,000 on an invoice you haven't been paid for.

Under the Cash Accounting Scheme:

Output VAT due only on the two invoices that were paid: £8,000
Input VAT reclaimed (supplier paid): £1,000
VAT payable to HMRC: £7,000

Cash accounting keeps £4,000 in your bank account this quarter instead of sending it to HMRC ahead of being paid. You'll account for that £4,000 later, in the quarter the slow payer finally settles up, by which point the cash is actually in your account to cover it.

	Standard (accrual) VAT	Cash Accounting Scheme
VAT due on	Invoice (tax point) date	Date the customer pays
Output VAT this quarter	£12,000 (all 3 invoices)	£8,000 (2 paid invoices)
Input VAT reclaimed	£1,000	£1,000
VAT payable to HMRC	£11,000	£7,000
Bad-debt relief	Separate claim, 6 months overdue	Automatic (no payment, no VAT)

Automatic bad-debt relief

The second big advantage falls out naturally from the cash rule. Because you only owe output VAT once you've been paid, a customer who never pays you never triggers a VAT bill. You get automatic bad-debt relief.

Under standard accrual VAT you'd have already paid the £4,000 over to HMRC, then had to claim bad-debt relief separately, usually only once the debt is at least six months overdue and written off in your accounts. With cash accounting, the relief is built in: no payment, no VAT. For businesses that suffer occasional non-payers, that's a meaningful simplification.

What the scheme doesn't cover

Cash accounting isn't all-or-nothing across every transaction. Some supplies must still be dealt with on the normal invoice-date basis even while you're in the scheme. These include:

Goods you buy or sell on hire purchase or lease.
Imports and goods brought into the UK.
Supplies where you raise a VAT invoice in advance of payment under specific arrangements.

For those items you account for VAT in the usual way, by reference to the invoice or tax point, and only apply cash accounting to the rest of your trade. It's worth flagging these exceptions to your bookkeeper so they're coded correctly.

Who the scheme suits, and who it doesn't

Cash accounting tends to help if:

You invoice on credit terms and customers routinely pay late.
You occasionally suffer bad debts.
You're a net payer of VAT — you charge more VAT than you reclaim, so the timing delay works in your favour.

It's usually less attractive if:

Your customers pay upfront or on the spot (retail, e-commerce), so there's no timing gap to exploit.
You're regularly in a VAT repayment position — for example a zero-rated business reclaiming a lot of input VAT. Cash accounting would delay your refunds until you've paid your suppliers, which hurts.
You buy a lot on credit from suppliers but get paid quickly by customers; standard accounting may let you reclaim input VAT sooner.

How it fits with the rest of your tax planning

VAT timing is just one lever. The way you draw money out of the business, run vehicles, and structure ownership all interact with your overall position. If you operate through a company, our guide on how to pay yourself from a limited company covers the salary-and-dividend mix, and the director's loan account explained is essential reading if you ever take cash out ahead of profits. If you're claiming for business travel, see contractor expenses through a limited company for what's allowable.

How to switch

Leaving the scheme (voluntarily, or because you've crossed £1.6 million) needs a one-off adjustment so you don't double-count or miss any VAT during the transition. On your final cash-accounting return you'll generally account for all the outstanding VAT on sales and purchases that haven't yet been paid, bringing you back into line with the standard invoice-based method. Plan the change to land cleanly at the end of a VAT period, and keep records of which invoices were already accounted for.

The bottom line

If you sell on credit and chase late payers, the VAT Cash Accounting Scheme is one of the simplest cash-flow wins available: you stop funding HMRC out of money you haven't collected, and bad debts stop costing you VAT. Just check the £1.35m / £1.6m thresholds, watch the excluded supplies, and make sure you're not the kind of business (upfront-paid or VAT-repayment) that's actually better off on accrual.

Sources

What does cash accounting for VAT mean?

Cash accounting VAT means you account for VAT based on when money actually changes hands rather than when invoices are raised. You pay output VAT to HMRC only once your customer has paid you, and you reclaim input VAT only once you have paid your supplier. It is the opposite of standard accrual VAT, where the invoice date decides which quarter the VAT falls into regardless of who has been paid.

Can I use cash accounting and the Flat Rate Scheme at the same time?

Not as separate schemes — the VAT Flat Rate Scheme has its own optional cash-based turnover method built in, so you wouldn't use the standalone Cash Accounting Scheme alongside it. The Cash Accounting Scheme is designed to sit with standard-rate VAT accounting. If you're choosing between schemes, get advice on which combination produces the lowest VAT bill and the best cash-flow outcome for your business.

What happens to VAT if my customer never pays the invoice?

Under the Cash Accounting Scheme you never have to account for the output VAT on an invoice that's never paid, because VAT only becomes due when you receive the money. That's the scheme's automatic bad-debt relief. Under standard accrual VAT you'd have paid the VAT over already and would have to make a separate bad-debt relief claim, generally only once the debt is at least six months overdue and written off.

Do I have to tell HMRC before I start using cash accounting?

No. There's no application or approval process. As long as your estimated VAT taxable turnover for the next 12 months is £1.35 million or less, your VAT returns and payments are up to date, and you're not using excluded supplies, you can simply start at the beginning of a VAT accounting period and record the change in your bookkeeping.

When do I have to leave the scheme?

You must leave once your VAT taxable turnover exceeds £1.6 million. You can join at £1.35 million or below, and the higher £1.6 million exit threshold gives you headroom so a single strong quarter doesn't immediately force you out. On leaving, you make a one-off adjustment to account for the VAT on any sales and purchases not yet paid.