VAT Cash Accounting Scheme: sales and purchase VAT both wait for cash
At the end of September a UK VAT-registered business has an unpaid £1,200 sales invoice and an unpaid £600 supplier invoice, both with September tax points. Under normal VAT accounting both go into the September return. Under the Cash Accounting Scheme neither does until money changes hands. Because the scheme delays both sides of the return, its effect depends on how quickly customers pay you compared with how quickly you pay suppliers.
What the scheme changes
HMRC's VAT Notice 731 describes two clocks. Output VAT is accounted for when customers pay, and input VAT is reclaimed when the business pays its suppliers, subject to the usual evidence and recovery conditions. The VAT rate does not change, and valid invoices are still needed. It is a VAT scheme only, separate from the cash basis for Income Tax and from the basis used for financial statements.
Under normal accounting, VAT follows the tax-point rules in Notice 700. The invoice date often sets the tax point, but not always: an earlier payment, the date of supply or a special rule can move it. Compare the scheme with the business's real tax points, not just its invoice dates.
Sources and context, checked :
One quarter, two clocks
This example is hypothetical. VAT periods end in September and December 2026. The business is eligible, supplies ordinary completed services at 20%, holds valid invoices and can recover all its input VAT. There is no excluded transaction, mixed rate or balance from before joining.
The sales invoice is £1,000 plus £200 VAT, issued on 20 September with a September tax point. The customer pays £600 in November and £600 in December. The supplier invoice is £500 plus £100 VAT, also with a September tax point, and the business pays it in December.
Each £600 receipt includes VAT, so at 20% it contains £100. That one-sixth fraction works for a single standard-rated invoice. A payment that covers several invoices or mixed rates has to be allocated first, so do not divide every receipt by six.
The total is the same. Only the timing moves. In our reading, a business whose customers pay promptly, or one that usually receives VAT repayments, can find that the scheme mainly delays the input VAT it would otherwise have reclaimed sooner.
| VAT period | Normal accounting | Cash Accounting Scheme |
|---|---|---|
| July to September: output VAT | £200 | £0 |
| July to September: input VAT | £100 | £0 |
| July to September: net payable | £100 | £0 |
| October to December: output VAT | £0 | £200 |
| October to December: input VAT | £0 | £100 |
| October to December: net payable | £0 | £100 |
| Total net VAT | £100 | £100 |
Joining and leaving
To join, a business generally expects taxable supplies of £1.35 million or less, excluding VAT, in the next year. Turnover is only one condition. Notice 731 also requires that no VAT returns are outstanding and that any VAT owed is covered by an agreed arrangement, and a business's compliance history or HMRC's exclusions can bar it. An eligible registered business can start at the beginning of a VAT period without applying, but it cannot switch retrospectively.
Once in the scheme, annual taxable supplies can reach £1.6 million, excluding VAT, before the ordinary exit rule applies. Going above that usually means leaving at the end of the current VAT period. A narrow exception for a one-off increase requires an expectation that supplies in the next 12 months will be below £1.35 million. HMRC requires a record of how the business decided it could remain on the scheme. Keep the assessment and its supporting evidence together.
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Transactions that stay on normal rules
The scheme generally covers the whole VAT-registered business, but some transactions are excluded and follow normal VAT rules. Notice 731 lists, among others, goods bought or sold under hire-purchase, lease-purchase, conditional-sale or credit-sale agreements, imports and relevant acquisitions, domestic reverse-charge supplies, invoices not due in full within six months, and invoices issued before the supply is made. Factoring and cross-border cases have their own provisions in the notice, so check them there rather than applying the simple payment rule.
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Count each invoice once at the switch
Joining and leaving both create a seam in the records. VAT on invoices already accounted for under normal rules before joining must not be counted again when the cash arrives. On leaving, VAT on supplies that are still unpaid has to be accounted for, even though the customer has not paid. Notice 731 offers a six-month option for this, subject to the exclusions in section 6.4.
Our recommended control is a dated list of open sales and purchase invoices at each switch date, marked with the basis each one falls under. Leaving can also change how a later bad debt is handled. Under the scheme, an unpaid sale has usually produced no output VAT to recover, but after exit that VAT may have been paid.
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Before choosing the scheme
Take the last four quarters of sales and purchase ledgers and work out how long customers actually took to pay and how long the business took to pay its suppliers. Rework one quarter's return on both bases. If the scheme still looks worthwhile, prepare the open-invoice list for the planned start date before that VAT period begins.