The VAT Cash Accounting Scheme and How It Helps Cash Flow

Under standard VAT accounting you pay HMRC the VAT on a sale as soon as you raise the invoice, even if the customer has not paid you yet. For a business with slow-paying customers, that can mean handing over VAT on money you are still chasing. The Cash Accounting Scheme changes the timing: you account for VAT when the money actually moves, not when the invoice is issued. This piece sits alongside the companion guides on the Flat Rate Scheme in 2026 and the limited cost trader trap.

Standard accounting versus cash accounting

On standard (or accrual) VAT accounting, the tax point is generally the invoice date. You owe HMRC the output VAT on a sales invoice in the period you raise it, and you reclaim input VAT on a purchase invoice in the period you receive it, regardless of whether either has been paid. On cash accounting, the tax point for VAT purposes becomes the payment date. You only pay output VAT once your customer pays you, and you only reclaim input VAT once you have paid your supplier.

The turnover thresholds

The scheme is for smaller businesses, and eligibility is set by VAT taxable turnover. The thresholds, confirmed on GOV.UK, are unchanged for 2026.

You do not have to tell HMRC when you join; you simply start using it from the beginning of a VAT period, provided you are eligible and up to date with your VAT returns and payments. You must leave once your VAT taxable turnover goes over £1.6 million.

Where cash accounting helps

The scheme is most valuable where customers pay slowly or unreliably. Because you do not account for output VAT until the customer pays, you are never funding the VAT on an invoice out of your own cash while you wait for settlement. It also gives automatic bad debt protection: if a customer never pays, you never owed the VAT on that sale in the first place, so there is no separate bad debt relief claim to make. For a business selling on 60 or 90-day terms, that timing difference can be a meaningful cash-flow cushion.

Where it works against you

The same mechanic that helps on sales can hurt on purchases. Because you cannot reclaim input VAT until you have actually paid your supplier, a business that buys heavily on credit reclaims its VAT later than it would under standard accounting. Two types of business are usually worse off on the scheme.

• Businesses that are routinely in a VAT repayment position, for example zero-rated traders reclaiming more than they charge, because cash accounting delays the repayments.
• Businesses that buy a lot on credit and sell for immediate payment, because they pay output VAT promptly but wait to reclaim input VAT.

A business that is paid up front by its customers, such as a typical retailer, gets little cash-flow benefit on the sales side and may simply slow down its input VAT recovery, so the scheme is rarely worth it for cash-up-front trades.

What the scheme does not cover

Cash accounting cannot be used for every transaction. It does not apply to goods bought or sold under hire purchase or lease purchase, to goods imported or moved from a warehouse, or to invoices where payment is not due for more than six months or is raised in advance of supply. You also cannot use the scheme if your VAT returns or payments are not up to date, and you must leave if you become insolvent or stop being eligible.

Joining, leaving and Making Tax Digital

Cash accounting is a change to the timing of when VAT is accounted for, not to how returns are filed. The business still keeps digital records and files through Making Tax Digital for VAT in the normal way. When you leave the scheme, whether because turnover exceeds £1.6 million or by choice, you have to account for any outstanding VAT on invoices that have not yet been paid. You can normally spread that catch-up over six months, unless your VAT taxable turnover in the previous three months was over £1.35 million, in which case it is payable straight away.

Common questions about cash accounting

Do I have to tell HMRC I am using cash accounting?

No. You can start using the scheme from the beginning of a VAT period without notifying HMRC, as long as you are eligible and up to date with your returns and payments. The decision is reflected in how you prepare your returns.

Can I claim bad debt relief on the scheme?

You do not need to. Because you only account for output VAT once a customer pays, an unpaid invoice never creates a VAT liability, so there is nothing to reclaim through bad debt relief. The protection is built into the scheme.

Is cash accounting good for a business that reclaims VAT?

Usually not. Businesses that are regularly in a repayment position, such as zero-rated traders, tend to be worse off because the scheme delays input VAT recovery until suppliers are paid. Standard accounting gets the repayments in sooner.

What happens to unpaid invoices when I leave?

You account for the outstanding VAT on invoices not yet paid when you leave the scheme. This can usually be spread over six months, unless your turnover in the last three months exceeded £1.35 million, in which case it is due immediately.

Whether cash accounting helps comes down to how your customers pay and how you buy. A VAT accountant can look at your payment terms on both sides and tell you quickly whether the scheme would protect your cash flow or quietly slow down your VAT recovery.