For a business that gives customers time to pay, a VAT bill can arrive before the customer settles the invoice. The VAT Cash Accounting Scheme may help with that timing. It changes when eligible businesses account for VAT on sales and purchases, but it is not the right choice for everyone.
How does VAT cash accounting work?
Under standard VAT accounting, VAT is generally accounted for by reference to invoices. Under the Cash Accounting Scheme, VAT on sales is generally accounted for when the customer pays. The other side is that VAT on purchases is generally reclaimed when you pay the supplier. If you are often paid slowly but pay suppliers quickly, that timing may support cash flow. If you make large purchases before receiving sales income, it may delay recovery of input VAT.
Who should consider it?
A VAT-registered business must meet the scheme’s eligibility rules, including a turnover test and up-to-date VAT compliance. Some types of transaction must still be handled under the standard rules. The scheme cannot simply be applied retrospectively to invoices already issued. Check the current conditions before changing your accounting method.
The scheme may be worth exploring if customers regularly pay on long terms or late. It may offer little advantage when most customers pay immediately, or when the business regularly reclaims more VAT than it pays. The benefit depends on actual cash movement rather than a general preference for simpler bookkeeping.
Compare both sides of the cash flow
List typical customer payment times, supplier payment times and the VAT on major purchases. Then model a normal quarter under each method. Include any unpaid invoices and supplier bills at the point of change, so the records remain complete. Your bookkeeper should know which invoices are paid, partly paid or still outstanding.
The VAT Cash Accounting Scheme guidance explains how the method works, while the eligibility page sets out the current conditions. AA & R Certified Accountants can compare the options against your trading pattern and help your records follow the method you choose. Get in touch for a review.
Related reading: VAT Registration: When It Makes Sense for Your Business.