How does the cash accounting scheme for VAT work?

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# VAT Cash Accounting Scheme

## What the law says

The legal basis for the Cash Accounting Scheme is found in **section 25(1) and paragraph 2(7) of Schedule 11 of the VAT Act 1994**, which provide the power for HMRC to make Regulations introducing the scheme. The detailed rules are set out in **VAT Regulations 1995, Part VIII (Regulations 56–65)**.

**How it works — the operative dates**

Regulation 57 defines the scheme's core mechanism: a taxable person may account for VAT whereby the operative dates are:
- **(a) for output tax** — the day on which payment or other consideration is **received**, or the date of any cheque, if later; and
- **(b) for input tax** — the date on which payment is **made** or other consideration is given, or the date of any cheque, if later.

**Leaving the scheme — turnover threshold**

Under Regulation 60, a business must withdraw from the scheme immediately at the end of a VAT accounting period if the value of its taxable supplies in the preceding 12 months has exceeded **£825,000**.

**Deregistration**

When a person on the cash accounting scheme deregisters, they must account for all outstanding VAT on supplies made and received during the last 12 months on their final VAT return, even where the customer has not paid. Cash accounting traders have **two months** (or such longer period as HMRC may allow) to submit their final return.

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## HMRC guidance / practice

**What the scheme is**

The Cash Accounting Scheme is an **optional** scheme introduced on **1 October 1987** as a deregulatory measure to ease burdens on small businesses, particularly those providing extended credit to customers. It gives **automatic bad debt relief** and is an accounting scheme that does not, in general, override the basic VAT rules on supply, consideration and liability.

**Eligibility — joining**

Businesses may use the scheme if the **annual value of taxable supplies (excluding VAT) does not exceed £1,350,000**. There is **no need to apply** to HMRC — a business may simply start using the scheme from the beginning of its next VAT period, provided it is eligible. The scheme **cannot be applied retrospectively**.

**How it differs from normal VAT accounting**

| | Normal VAT rules | Cash Accounting Scheme |
|---|---|---|
| **Output tax** | Accounted for when VAT invoice is *issued* | Accounted for when payment is *received* |
| **Input tax** | Reclaimed when VAT invoice is *received* | Reclaimed only when supplier is *paid* |

**Key benefits**

- Particularly beneficial for businesses that give customers **lengthy credit periods** or have **high levels of bad debts**, as VAT is not due until payment is received.
- Provides **automatic bad debt relief** — if a customer never pays, no VAT is ever due on that supply.

**Bad debt relief on leaving the scheme**

When leaving the scheme, a business must account for VAT on all unpaid supplies, but may claim **bad debt relief** where the debt is 6 months overdue from the date it became due (or the date of supply, whichever is later) and has been written off in the business accounts.

**Schemes that cannot be used alongside it**

The Cash Accounting Scheme **cannot** be used with the **Flat Rate Scheme**, though the Flat Rate Scheme has its own cash-based method. It **can** be used alongside the **Annual Accounting Scheme**.

**Legal force of Notice 731**

Any additional rules in VAT Notice 731 (beyond those in Regulations 56–65) have the **force of law**. Regulation 59 allows the published terms to be altered by publication of a new or amended notice.

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	Normal VAT rules	Cash Accounting Scheme
Output tax	Accounted for when VAT invoice is issued	Accounted for when payment is received
Input tax	Reclaimed when VAT invoice is received	Reclaimed only when supplier is paid