Managing cash flow can be a precarious balancing act, especially if you’re waiting on slow-paying customers. 

Late payments, as our clients regularly tell us, are a common and annoying headache for small businesses and freelancers, and having to hand over VAT to HMRC before you’ve even been paid can make things even tougher.

The VAT Cash Accounting Scheme could ease some of that pressure by letting you pay VAT to HMRC only after your customers have paid you – rather than when you issue an invoice.

So in response to popular requests, today we’ll explain exactly how the scheme works, the pros and cons, and how to decide if it’s a good option for your own business.

If you want to make your VAT submissions ridiculously easy and save mountains of time, then try our awesome VAT service for an affordable, simple and quick filing experience. 

What is VAT cash accounting?

The VAT Cash Accounting Scheme lets you account for VAT based on the money you actually receive and pay, rather than the invoices you issue.

That means:

• You only pay VAT to HMRC when your customers pay you, not when you raise an invoice.
  
  
• You only reclaim VAT on purchases once you’ve paid your suppliers.
  
  

This can make managing cash flow easier because you’re not handing over VAT before the money has hit your bank account.

By contrast, under the accrued VAT accounting method (also called the invoice basis), VAT is due as soon as you issue an invoice, even if your client doesn’t pay you for weeks – or months.

The scheme is optional, so you can choose whether it’s the right fit for your business.

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How does the VAT cash accounting scheme work?

The scheme is designed to be simple, but there are a few key rules you need to know:

1. When you pay VAT to HMRC

You only pay VAT once your customer has actually paid you. If they don’t pay then you don’t owe the VAT, which can be a big help if you deal with late payers.

2. When you reclaim VAT on purchases

If you normally get invoiced and pay later, switching to cash accounting means you’ll have to wait until you’ve actually paid before reclaiming VAT. In turn this could delay your claim compared to the invoice or accrued scheme.

3. VAT returns

You’ll still file VAT returns in the usual way (monthly, quarterly or annually), but your VAT figures are based on cash received and paid rather than invoices issued.

4. Eligibility and turnover limits

• You must be VAT-registered to join.
  
  
• Your estimated VAT-taxable turnover must be £1.35 million or less in the next 12 months to join the scheme.
  
  
• You must leave the scheme if your turnover goes above £1.6 million.

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What are the benefits of VAT cash accounting?

The VAT Cash Accounting Scheme can be a great option for businesses that need to keep a closer eye on cash flow. Here are some of the key benefits:

Better cash flow management

Because you only pay VAT once you’ve been paid by your customers, you’re not handing money over to HMRC before it’s even hit your bank account.

Protection against late payments

If you work with clients who take weeks or even months to pay, this scheme stops you from being out of pocket while you wait.

Easier to track

For many small businesses and freelancers, cash accounting feels more straightforward because it reflects the actual movement of money in and out of your bank account.
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Potential drawbacks… 

Despite being a highly useful option, the VAT Cash Accounting Scheme isn’t right for every business. There are a few potential drawbacks to consider. Mainly issues like delayed VAT reclaims, the fact it’s less beneficial for fast-paying customers, and also that turnover limits apply.

Business owners thinking of using the scheme should be aware that,

• If most of your clients pay you immediately (or very quickly), you won’t see much of a cash flow benefit compared to accrued or invoice VAT accounting.
• You need to leave the scheme if your turnover goes over £1.6 million, which might be something to bear in mind if you’re growing quickly.
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Is VAT cash accounting right for my business?

The VAT Cash Accounting Scheme works best for businesses that:

• Have customers who are slow to pay.
  
  
• Want to keep tighter control of cash flow.
  
  
• Have relatively low upfront costs, so delayed VAT reclaims aren’t a big issue.
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• Businesses who offer a long payment period.
  
  

If you’re unsure which VAT scheme is right for you, it’s always worth speaking to an accountant. They can look at your cash flow, customer payment habits, and growth plans to help you make the best decision.

Not sure which VAT scheme to choose? Our expert accountants can help you find the most tax-efficient option for your business.
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How to join or leave the scheme (optional, depending on client preferences)

If you've read the article and decided joining the VAT Cash Accounting Scheme is right for you, then you're in luck. Because joining the scheme is actually really straightforward:

Not registered for VAT?

If you haven't registered yet for VAT but know you need to, all you need to do is choose the cash accounting option when you first sign up.

Already VAT-registered?‍

Again, this option is pretty simple. So if you've already registered for VAT, all you need to do is inform HMRC that you want to switch to cash accounting.

You can usually stay in the scheme as long as your turnover stays below £1.6 million. If it goes above that, you’ll need to switch back to the accrued or invoice VAT accounting method.

If you’re thinking about joining (or leaving) the scheme, it’s a good idea to get professional advice first to make sure it’s the best choice for your business. Crunch is a great accounting partner, we guide our clients through decisions like this every day.
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Our final thoughts on the VAT Cash Accounting Scheme

The VAT Cash Accounting Scheme can be a smart way to smooth out cash flow, especially if you’re dealing with slow-paying customers. By only paying VAT once you’ve been paid, you keep more money in your business for longer, which can make a big difference if you’re running on tight margins.

However, it’s not the right choice for everyone. If you have high upfront costs or most of your customers pay quickly, the accrued or invoice VAT scheme might work better.

Not sure which VAT scheme is best for you?

Our accountants at Crunch can help you choose the most tax-efficient option and handle the paperwork, so you can focus on running your business.

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