Taxation (UK) · The effect of special schemes

Cash Accounting Scheme for VAT Explained

Updated 11 October 2026 · Fact-checked

The VAT cash accounting scheme lets a business account for output VAT when it receives payment and claim input VAT when it pays. You can join if expected taxable turnover is £1,350,000 or less, and you must leave above £1,600,000. It gives automatic bad debt relief, because unpaid sales never produce output VAT.

Understand Cash Accounting Scheme for VAT

Normally you account for VAT on the tax point of each sale or purchase, which is usually the invoice date. That means you may pay VAT to HMRC on a sale before your customer has paid you.

The cash accounting scheme changes the timing. You account for output VAT in the VAT return for the period in which you receive the money. You claim input VAT in the return for the period in which you pay your supplier. The invoice date no longer matters.

The main benefit is cash flow and automatic bad debt relief. If a customer never pays, you never account for the output VAT, so you do not need to make a separate bad debt relief claim. The scheme helps if customers pay slowly or default. It hurts if you pay suppliers slowly, because you recover input VAT later. If customers pay promptly, the scheme gives little or no advantage.

There are entry conditions. Your expected taxable turnover (excluding VAT) for the next 12 months must not exceed the joining limit. You must also be up to date with VAT returns and payments. You cannot join if you have recently been convicted of a VAT offence or charged a penalty for dishonest conduct. Once in, you may stay until taxable turnover exceeds the leaving limit.

The scheme is not allowed for some supplies where payment is spread over time, such as hire purchase, credit sale and conditional sale agreements. For those, VAT is accounted for on the normal basis.

Key rules to remember

Joining limit: Expected taxable turnover (excl. VAT) in next 12 months ≤ £1,350,000; Test it on a forward-looking basis. The cash accounting limits are not given in the tax tables, so you must memorise them.
Leaving limit: Must leave when taxable turnover exceeds £1,600,000; The leaving limit is higher than the joining limit, so a growing business is not forced out at once.
Output VAT on receipts: VAT on a receipt = gross receipt × 20/120 (standard rate); Use the cash received in the period, not invoices issued.
Input VAT on payments: VAT on a payment = gross payment × 20/120 (standard rate); Use the cash paid in the period, not invoices received.
VAT payable for the period: Output VAT on receipts − input VAT on payments; A negative result is a repayment due from HMRC.
Standard rate and registration limits: Standard rate 20%; registration limit £90,000; deregistration limit £88,000; These are separate from the scheme limits. Do not mix them up.

How to solve Cash Accounting Scheme for VAT questions

Use this method for any question on the cash accounting scheme, whether it is a calculation, an eligibility test or a discussion.

1Check eligibility first. Compare expected taxable turnover for the next 12 months (excluding VAT) with £1,350,000 to join. If already in the scheme, compare actual taxable turnover with £1,600,000.
2Check the other conditions: VAT returns and payments up to date, and no recent VAT conviction or dishonesty penalty.
3List only cash movements in the period. Ignore invoice dates, but include cash from invoices issued in earlier periods.
4Strip VAT out of gross receipts and payments using 20/120 if the figures include VAT. If they are net, multiply by 20%.
5Calculate output VAT on receipts and input VAT on payments, then take the difference.
6For bad debts, state that unpaid sales never create output VAT, so no relief claim is needed. Remember that input VAT on purchases you have not paid for cannot yet be claimed.
7If asked to advise, compare the cash flow effect: customers' payment speed against your own payment speed, and the admin of leaving the scheme.

Quickest way: Cash in, cash out

When to use it: Use this in Section A and Section B objective test questions where you are given receipts, payments or a turnover figure and need an answer fast.

Scan for the turnover figure. If it is a limit question, compare it with £1,350,000 (join) or £1,600,000 (leave) and decide at once.
Cross out invoice dates, credit notes not yet settled and anything unpaid. Keep only cash received and cash paid in the period.
Check whether the amounts include VAT. If they do, multiply by 1/6; if not, multiply by 20%.
Output VAT minus input VAT is the answer. Check the sign before you choose an option.

Common mistakes in Cash Accounting Scheme for VAT

Using invoice dates instead of payment dates.
Students are used to the normal tax point rules and apply them out of habit.
Fix: Under the scheme, only the date money moves matters. Mark each item as cash or not cash before calculating.
Mixing up the joining limit and the leaving limit.
Both figures are close in size and both relate to turnover.
Fix: Remember that you join at £1,350,000 or less of expected turnover, and leave when turnover exceeds £1,600,000. Joining is forward-looking.
Using the VAT registration limit of £90,000 for the scheme.
Registration and scheme limits are all VAT thresholds, and students blur them.
Fix: Keep two separate lists: registration and deregistration (£90,000 and £88,000), and scheme limits (£1,350,000 and £1,600,000).
Claiming bad debt relief as well as using cash accounting.
Students know bad debt relief from the normal VAT rules and add it automatically.
Fix: Under cash accounting no output VAT was accounted for on the unpaid sale, so no relief claim exists. A second claim would double count.
Applying 20% to gross amounts that already include VAT.
Questions switch between net and gross figures without much warning.
Fix: Read whether the figure includes VAT. Gross figures use 20/120, which is 1/6. Net figures use 20%.
Saying the scheme always helps cash flow.
The bad debt and delayed output VAT benefits are well known, so the drawback gets forgotten.
Fix: State both sides. The scheme helps if customers pay slowly or default. It hurts if you pay suppliers slowly, because input VAT is recovered later. If customers pay promptly, the scheme gives little or no advantage.

Worked examples

Example 1

A VAT-registered business uses the cash accounting scheme. In a quarter it issued sales invoices of £72,000 including VAT, and received cash of £54,000 including VAT (this includes £12,000 from invoices issued in the previous quarter). It received purchase invoices of £36,000 including VAT and paid £42,000 including VAT to suppliers. All supplies are standard-rated. Calculate the VAT payable for the quarter and compare it with the normal invoice basis.

Show the solution

Output VAT is based on cash received: £54,000 × 20/120 = £9,000.
Input VAT is based on cash paid: £42,000 × 20/120 = £7,000.
VAT payable under cash accounting = £9,000 − £7,000 = £2,000.
Normal basis output VAT: £72,000 × 20/120 = £12,000.
Normal basis input VAT: £36,000 × 20/120 = £6,000.
Normal basis VAT payable = £12,000 − £6,000 = £6,000.

Answer: VAT payable under the cash accounting scheme is £2,000, compared with £6,000 on the normal basis. The scheme is better this quarter because customers paid less than was invoiced and the business paid more than it was invoiced.

Example 2

Sunil is a VAT-registered trader who expects taxable turnover of £1,420,000 (excluding VAT) over the next 12 months. (a) Can he join the cash accounting scheme? (b) A different trader already in the scheme has an invoice of £10,000 plus VAT at 20% which the customer never pays. Explain the VAT effect under the scheme.

Show the solution

(a) The joining test uses expected taxable turnover for the next 12 months, excluding VAT.
£1,420,000 is more than the joining limit of £1,350,000.
So Sunil does not meet the turnover condition and cannot join.
(b) Under cash accounting, output VAT arises only when payment is received.
The customer never pays, so no output VAT of £10,000 × 20% = £2,000 is ever accounted for.
So the trader has automatic bad debt relief. No separate claim is needed.

Answer: (a) No, Sunil cannot join because expected turnover of £1,420,000 exceeds £1,350,000. (b) The trader never accounts for the £2,000 output VAT on the unpaid invoice, so relief is automatic and no bad debt relief claim is made.

Exam tips

Do the limit test first. Many objective questions only test whether you know £1,350,000 to join and £1,600,000 to leave.
Check whether figures include VAT. Use 1/6 for gross figures and 20% for net ones.
In Section C or an advice question, give both an advantage and a disadvantage, and link each to the facts: how fast customers pay and how fast the business pays suppliers.
Watch for hire purchase, credit sale or conditional sale supplies, which are outside the scheme.
Write your workings in two columns, cash received and cash paid. Objective answers are all or nothing, so one wrong sign costs the whole mark.

Practice questions from The effect of special schemes

Cash Accounting Scheme for VAT: frequently asked questions

Who can use the VAT cash accounting scheme?

A VAT-registered business can join if its expected taxable turnover for the next 12 months, excluding VAT, is not more than £1,350,000. It must also be up to date with VAT returns and payments and must not have a recent VAT conviction or dishonesty penalty.

When must a business leave the cash accounting scheme?

It must leave when its taxable turnover exceeds £1,600,000. The leaving limit is higher than the joining limit, so a growing business has some room before it is forced out.

How does the cash accounting scheme give automatic bad debt relief?

Output VAT is only accounted for when the customer pays. If the customer never pays, the output VAT is never due, so you never pay VAT you did not collect. No separate bad debt relief claim is needed (or possible) under the scheme, because output VAT is only accounted for on receipt of payment, so relief is effectively automatic.

What are the disadvantages of the cash accounting scheme?

Input VAT is only reclaimed when you pay suppliers, so a business that pays late recovers VAT later. It also adds record keeping, because you must track the date of each receipt and payment. A business that is paid promptly gains little.