Cash Accounting Scheme for VAT

Usually, when you account for VAT you use the invoice date: you account for VAT on sales when you issue VAT invoices to customers, and on purchases when you receive valid VAT invoices from suppliers. Under this approach you might have to pay VAT to HM Revenue and Customs (HMRC) before your customers have actually paid you, which can create cash‑flow pressure.

The VAT Cash Accounting Scheme (CAS) lets you account for VAT on the date you receive or pay money instead. You pay output VAT to HMRC only when customers pay you, and you reclaim input VAT only when you pay your suppliers.

Key HMRC guidance you can refer to:

• Overview: https://www.gov.uk/vat-cash-accounting-scheme
• Eligibility: https://www.gov.uk/vat-cash-accounting-scheme/eligibility
• Detailed rules (VAT Notice 731): https://www.gov.uk/guidance/cash-accounting-scheme-vat-notice-731

Who can use the Cash Accounting Scheme?

You can normally use the Cash Accounting Scheme if:

• Your estimated VAT‑taxable turnover for the next 12 months is £1.35 million or less (this is all supplies liable to VAT at any rate, excluding VAT itself, and excluding most VAT‑exempt income and one‑off sales of capital assets).
• You are up to date with your VAT returns and payments.
• You have not been convicted of a VAT offence or penalised for VAT evasion in the last 12 months.

You must leave the scheme if your VAT‑taxable turnover goes over £1.6 million. These thresholds and conditions are set out on GOV.UK.

See:
https://www.gov.uk/vat-cash-accounting-scheme/eligibility

When you must still use standard (invoice) accounting

Even if you use CAS, some types of transactions must still be accounted for on the normal invoice‑basis. Under current HMRC rules this includes, for example:

• Supplies under lease purchase, hire purchase, conditional sale or credit sale agreements.
• Imports or acquisitions where special rules apply (for example, some movements of goods into Northern Ireland from the EU).
• Goods removed from a customs warehouse or free zone.
• VAT invoices issued with payment terms of 6 months or more.
• VAT invoices issued in advance of providing the goods or services.

You should check VAT Notice 731 for the precise list and examples:
https://www.gov.uk/guidance/cash-accounting-scheme-vat-notice-731

Advantages of the Cash Accounting Scheme

The main benefits of CAS are:

• You only pay VAT to HMRC on the sales income you have actually received in that VAT period. This helps align your VAT payments with your cash receipts and avoids paying VAT on unpaid invoices.
• If a customer never pays (a bad debt), you do not have to pay VAT on that sale in the first place, because you only account for VAT when cash is received.
• It can make cash‑flow management easier for businesses with longer customer payment terms or slow‑paying customers.

These points reflect HMRC’s own description of the scheme’s purpose.

Disadvantages of the Cash Accounting Scheme

There are also drawbacks:

• You cannot reclaim input VAT on purchases until you have actually paid your suppliers. If you buy a lot on credit, this delays VAT recovery.
• If you usually reclaim more VAT than you pay (for example, exporters or capital‑intensive businesses), you might receive VAT repayments later than under standard accounting unless you settle supplier invoices quickly.
• For start‑ups that join CAS immediately, there may be a delay in reclaiming VAT on start‑up costs if those bills are not paid straight away.
• If you leave CAS, you must account for VAT on any outstanding (unpaid) sales and purchases that have not yet gone through your VAT returns.

HMRC’s notice explains how to bring those outstanding amounts into your returns when you exit the scheme.

See the detailed “advantages and disadvantages” commentary in VAT Notice 731:
https://www.gov.uk/guidance/cash-accounting-scheme-vat-notice-731

Record‑keeping under CAS

The core record‑keeping requirement is that your VAT records must clearly show:

• When you actually received customer payments and when you actually paid suppliers.
• Which invoices those payments relate to.
• Evidence of payment such as bank statements, cheque stubs or paying‑in slips.

A practical way to do this is to:

• Cross‑reference each payment received/made to the relevant sales or purchase invoice in your records.
• Note the date and amount paid on either the invoice itself or in your accounting system/cash book.

HMRC sets out what records must be kept for VAT generally (and for CAS specifically) on GOV.UK.

Joining and leaving the Cash Accounting Scheme

Joining:

• You do not normally need to fill in a separate application form to use CAS.
• If you meet the conditions, you can start using it from the beginning of any VAT period, or from the date you register for VAT if you choose it from the outset.
• When switching from standard VAT accounting to CAS, you must ensure you do not account for VAT twice on the same invoices; HMRC’s notice explains the transition rules.

Leaving:

• You can leave the scheme at the end of any VAT period if you wish.
• You must leave if your VAT‑taxable turnover exceeds (or is expected to exceed) £1.6 million.
• HMRC can withdraw your use of CAS if you no longer meet the conditions, calculate VAT incorrectly, or are involved in serious VAT non‑compliance.

On leaving CAS, you must bring into your VAT returns any VAT on outstanding (unpaid) invoices within a set period (often in your final CAS return or within the following 6 months, depending on the circumstances). If HMRC removes you from the scheme, you may be required to account for these amounts more quickly.

Further guidance on joining and leaving is included in:
https://www.gov.uk/guidance/cash-accounting-scheme-vat-notice-731

Interaction with the Flat Rate Scheme

The Cash Accounting Scheme cannot be used together with the Flat Rate Scheme. If you use the Flat Rate Scheme, you apply its own rules (including its own “cash‑based turnover” option for some businesses) instead of CAS.

Flat Rate Scheme rules are here:
https://www.gov.uk/guidance/flat-rate-scheme-for-small-businesses-vat-notice-733

If you would like any assistance or advice regarding the above, or VAT in general, please do not hesitate to contact us.