VAT guide · Updated for 2026
The VAT Cash Accounting Scheme: pay VAT when you get paid
If your customers take their time to pay, handing VAT to HMRC before the money has reached you can sting. The Cash Accounting Scheme turns that around. You account for VAT on the day cash changes hands rather than the day you raise an invoice, so you pay VAT once your customer has paid you and reclaim it once you have paid your own suppliers. Here is how it works, who it suits, and how to join, all current for 2026.
Join at £1.35 million or less
You can start using the scheme when your estimated VAT taxable turnover for the next twelve months is £1.35 million or less.
Leave once you pass £1.6 million
You must leave at the end of a VAT period if your taxable turnover goes over £1.6 million.
Pay VAT when you get paid
VAT on a sale is due when the customer pays, and you reclaim VAT on a cost once you have paid the supplier.
The rate does not change
The scheme moves the timing of VAT, not the amount. Most sales are still at the 20% standard rate.
What the scheme actually does
Under normal VAT accounting, the date on the invoice is what counts. You owe HMRC the VAT on a sale as soon as you invoice it, even if the customer has not paid, and you reclaim VAT on a purchase as soon as the invoice arrives, even if you have not paid for it yet. The Cash Accounting Scheme swaps invoice dates for payment dates. Nothing about the VAT rate or the amount on each sale changes. What changes is the moment the VAT lands on your return.
How it works, with a quick example
The easiest way to see the difference is with a single invoice.
You invoice a customer £10,000 plus £2,000 of VAT, and they pay you sixty days later. Under normal accounting you would owe HMRC that £2,000 on the invoice date, so you could be paying VAT out of your own pocket two months before the customer settles up. Under cash accounting the £2,000 only becomes due once the customer pays. The trade off runs the other way for your own costs: you can only reclaim the VAT on something you have bought once you have actually paid the supplier, not when the invoice lands.
Is the Cash Accounting Scheme right for you?
Answer four quick questions and the checker will give you a plain view of whether the scheme is likely to help. It stays on this page and nothing is saved.
Cash Accounting Scheme checker
A guide only. Your own numbers and HMRC guidance always come first.
1. What is your estimated VAT taxable turnover for the next twelve months?
2. How do your customers usually pay you?
3. On a normal VAT return, are you usually due a refund or do you usually pay?
4. Do you invoice now but get paid much later?
Pick an answer to each question to see the result.
Who can use it
You can join if your estimated VAT taxable turnover for the next twelve months is £1.35 million or less, and a few housekeeping conditions are met. Your VAT returns need to be up to date, you need to have paid what you owe HMRC or agreed a plan to clear it, and you must not have been convicted of a VAT offence or picked up a penalty for dishonest VAT evasion in the past year. You cannot use cash accounting if you are on the Flat Rate Scheme. There is no form to fill in and no need to tell HMRC. You simply start using it from the beginning of a VAT period, and you cannot backdate it to invoices you have already dealt with the normal way.
When it helps, and when it does not
The scheme is built for businesses that wait to be paid. If you give customers credit terms, get paid well after you invoice, or carry the odd bad debt, cash accounting keeps your VAT bill in step with your bank balance. Because VAT is only due once the customer pays, an invoice that is never paid never creates a VAT liability, so bad debts are taken care of for you.
It does less for you when the money tends to arrive with the sale, so a shop paid at the till sees little timing gain. It can also work against you if you usually reclaim more VAT than you charge, since you would wait longer for those refunds, or if you make continuous supplies of services. Weigh it up before you switch.
What has to stay on normal accounting
A few things sit outside the scheme even while you use it, so they keep following the usual invoice based rules. These are the main ones:
- Goods you buy or sell under hire purchase, lease purchase, conditional sale or credit sale.
- Imported goods, goods you bring into Northern Ireland from the EU, and goods you take out of a customs warehouse. You can still use the scheme on the onward sale of those goods.
- Supplies that fall under a VAT reverse charge, such as a lot of construction work.
- Any invoice with payment terms of six months or more, or any invoice you raise before you actually make the supply.
How to join and how to leave
Joining is as simple as starting to use it from the first day of a VAT period. Leaving happens at a period end too. You can step out whenever you like, and you have to once your turnover tips over £1.6 million. When you leave, you need to account for the VAT still outstanding on the sales and purchases from your time in the scheme, though you can spread that over the following six months rather than paying it all at once. That six month option is not open to you if you are leaving because turnover passed £1.6 million and your sales in the last three months were themselves over £1.35 million, or if HMRC has told you to stop using the scheme.
How it fits with the other schemes
You cannot run cash accounting alongside the Flat Rate Scheme, because the Flat Rate Scheme already has its own cash based option built in. You can pair it with the Annual Accounting Scheme, which lets you file one VAT return a year and pay in instalments. For a lot of small businesses, cash accounting on its own does the job. If you are weighing up your options, our free VAT calculator can help you sense check the numbers, and if your turnover has dropped you may also want to read about cancelling your VAT registration.
Common questions
No. There is no application and no form. As long as you meet the conditions, you just start using it from the beginning of a VAT period.
No, only when you pay it. The VAT rates and the amount due on each sale are exactly the same. The scheme moves the timing to when money actually changes hands.
Because VAT is only due once you have been paid, an unpaid invoice never creates a VAT bill in the first place. That means you do not have to make a separate bad debt claim for it.
Yes, but only once you have paid the supplier. Under cash accounting the reclaim follows the payment, not the invoice date.
You can join with estimated taxable turnover of £1.35 million or less for the next twelve months, and you have to leave once your turnover goes above £1.6 million.
No. The two cannot be combined, since the Flat Rate Scheme has its own cash based method. You can, however, use cash accounting together with the Annual Accounting Scheme.
Figures and rules checked against gov.uk and HMRC VAT Notice 731, current for 2026. This is general information rather than advice for your own business, so please confirm your position with HMRC or your accountant.