Tax year: 2026/27 | Last reviewed: 2 October 2026
Under standard VAT accounting, you pay VAT to HMRC based on the date of your invoices, even if your customer has not paid you yet. The Cash Accounting Scheme changes that: you pay VAT on sales when you are paid, and reclaim VAT on purchases when you pay for them. For businesses that give credit, it can make a big difference to cash flow.
Who can use it?
- You can join if your estimated VAT-taxable turnover for the next 12 months is £1.35 million or less.
- You must leave once your taxable turnover goes over £1.6 million.
- You must be up to date with VAT returns and payments, with no recent VAT offences.
There is no application. You simply start using it from the beginning of a VAT period and keep records on that basis.
How it helps cash flow
A Burgess Hill design agency invoices a client £12,000 plus £2,400 VAT on 20 March, and the client pays on 30 April. Under standard accounting, the £2,400 is due on the VAT return for the quarter to 31 March, before the client has paid. Under cash accounting, it falls into the quarter to 30 June, when the money has arrived. If a customer never pays, there is no VAT to pay at all, which gives automatic bad debt relief.
The downsides
- You only reclaim VAT on purchases once you have paid them, so if you pay suppliers slowly or buy a lot on credit, the scheme can delay your reclaims.
- Businesses that regularly reclaim VAT, such as those making mainly zero-rated sales, are usually better off on standard accounting.
- You cannot use it for goods bought or sold on hire purchase, conditional sale or similar agreements, or for invoices paid in advance more than six months ahead.
- When you leave, you must account for outstanding VAT on unpaid invoices.
Combining with other schemes
You can use cash accounting alongside the Annual Accounting Scheme. The Flat Rate Scheme has its own cash-based turnover option, so you would not use the two together. Cloud software such as Xero handles cash basis VAT automatically once it is set up.
Is cash accounting right for you?
Good fit: service businesses with 30 to 60 day payment terms, trades who invoice on completion, any business with occasional bad debts.
Poor fit: businesses that are mostly paid upfront, retailers, and businesses in a regular VAT repayment position.
FAQs
What is the cash accounting VAT threshold?
£1.35 million to join and £1.6 million to leave.
Can I switch from standard to cash accounting?
Yes, at the start of a VAT period, provided you meet the conditions. Make sure invoices already accounted for under standard accounting are not taxed twice.
Does cash accounting change my VAT deadline?
No. Returns and payments are still due one month and seven days after the period end. Read more about VAT penalties and interest.
Talk it through with Digivolve
We review which VAT scheme suits your business when you register, and again as you grow.
This article is general information based on the rules for the 2026/27 tax year as at October 2026. It is not personal tax advice. Rates and thresholds can change, so please speak to us before acting.