The VAT cash accounting scheme

The limits

Joining

Estimated taxable turnover of £1.35 million or less in the next 12 months (GOV.UK: eligibility)

Leaving

Must leave when taxable turnover is more than £1.6 million

Notice

VAT Notice 731

How the scheme works

GOV.UK sets out the rule: output VAT is due in the period the customer pays, and input VAT is reclaimed in the period the business pays the supplier. Under standard accounting both follow the invoice date.

The main effect is on cash flow and bad debts. VAT Notice 731 says a business on the scheme does not account for VAT on a debt that has never been paid, so it has no need to claim bad debt relief while it stays in the scheme.

Purchases work the other way. VAT on a supplier's invoice is reclaimed only once the business has paid it, so a business that pays its suppliers late reclaims later.

A worked example

For example, a decorator on quarterly returns to 30 September invoices £12,000 plus £2,400 VAT on 15 September, and the customer pays on 10 October. Under standard accounting the £2,400 goes in the September return. Under cash accounting it goes in the December return, because that is the period in which payment arrived (GOV.UK).

If the same customer never pays, the £2,400 is never declared while the decorator stays in the scheme.

Who cannot use it

• A business on the flat rate scheme (GOV.UK: eligibility). See the flat rate scheme and limited cost traders.
• A business that is not up to date with its VAT returns or payments.
• A business that has committed a VAT offence, such as VAT evasion, in the last 12 months.

Transactions that stay on standard accounting

• Invoices with payment terms of 6 months or more (GOV.UK: eligibility).
• Invoices raised in advance of the supply.
• Lease purchase, hire purchase, conditional sale and credit sale.
• Imports of goods into Northern Ireland from the EU, and moving goods out of a customs warehouse.
• Supplies within the construction domestic reverse charge. The reverse charge technical guide says cash accounting cannot be used for those supplies, bought or sold.
• Imports and acquisitions, which VAT Notice 731 also lists as excluded.

Joining the scheme

1. Check eligibility

   Confirm estimated taxable turnover for the next 12 months is £1.35 million or less and that returns and payments are up to date (GOV.UK).

2. Start at a period boundary

   A business joins at the beginning of a VAT accounting period. There is no application and HMRC does not need to be told (GOV.UK: join or leave).

3. Avoid double counting

   Sales invoiced before joining were already declared under standard accounting. When those customers pay after joining, the VAT is not declared again. The same applies to purchases already reclaimed.

4. Keep the cross-references

   VAT Notice 731 requires records that cross-refer each payment received to its sales invoice, and each payment made to its purchase invoice and the bank statement.

Leaving the scheme

A business must leave when its taxable supplies, including disposals of stock and capital assets, reach £1.6 million in the 12 months to the end of a VAT period (VAT Notice 731). It can also leave voluntarily at any time; GOV.UK suggests the end of an accounting period, and HMRC need not be told (GOV.UK).

On leaving, the business must account for all outstanding VAT, whether or not its customers have paid. VAT Notice 731 allows a choice: account for it all in the period it stops using the scheme, or take a further 6 months. The 6-month option is not available if HMRC withdrew the scheme, or if taxable supplies in the previous 3 months were more than £1.35 million.

Debts still unpaid after leaving can then be considered for bad debt relief, if its conditions are met.

Questions