For many small businesses in the UK, managing cash flow is one of the biggest financial challenges. This is where the VAT Cash Accounting Scheme can help. Instead of paying VAT when you issue invoices, the scheme allows you to pay VAT only when your customers actually pay you.
Understanding the VAT cash accounting threshold is important if you are considering joining the scheme or checking whether your business still qualifies. In this guide, we explain the current VAT Cash Accounting Scheme limits, how the scheme works, its advantages and disadvantages, and who it is best suited for.
If you are looking for help with your business and accounting, get in touch with Clayton Stirling today.
What Is the VAT Cash Accounting Scheme?
The VAT Cash Accounting Scheme is a method of accounting for VAT where businesses:
- Pay VAT to HMRC when customers pay them
- Reclaim VAT on purchases when suppliers are paid
This differs from standard VAT accounting, where VAT is usually recorded based on invoice dates rather than payment dates.
The scheme is designed to help improve cash flow for smaller businesses by preventing them from paying VAT before they have actually received payment from customers.
What Is the VAT Cash Accounting Threshold?
To join the VAT Cash Accounting Scheme, your business must have a VAT taxable turnover of £1.35 million or less.
This is known as the entry threshold.
You can continue using the scheme until your turnover exceeds £1.6 million.
These thresholds are set by HMRC and apply across the UK. (gov.uk)
Current VAT Cash Accounting Thresholds
| Threshold Type | Amount |
|---|---|
| Join the scheme | £1.35 million |
| Leave the scheme | £1.6 million |
Who Can Use VAT Cash Accounting?
Most VAT-registered businesses can use the scheme if they meet the turnover requirements.
It is commonly used by:
- Sole traders
- Limited companies
- Freelancers
- Contractors
- Construction businesses
- Retailers
- Service-based businesses
However, some businesses cannot use the scheme, including those:
- Behind on VAT returns or payments
- Convicted of VAT offences
- Using certain VAT margin schemes
- Operating under insolvency procedures
How Does VAT Cash Accounting Work?
Under standard VAT accounting:
- You pay VAT when an invoice is issued
- Even if the customer has not paid yet
Under cash accounting:
- You only pay VAT after receiving payment
- You only reclaim VAT once you have paid suppliers
Example
A business issues a £6,000 invoice including VAT in June, but the customer does not pay until August.
- Under standard VAT accounting, the VAT is due in June’s VAT return.
- Under cash accounting, the VAT is not due until payment is received in August.
This can significantly improve short-term cash flow.
Advantages of VAT Cash Accounting
Improved Cash Flow
The biggest advantage is avoiding VAT payments on unpaid invoices.
This is especially useful for businesses with:
- Slow-paying customers
- Long payment terms
- Irregular income
Easier Debt Management
If a customer never pays an invoice, you avoid paying VAT upfront and later reclaiming it.
Simpler Financial Planning
Many smaller businesses find cash accounting easier to understand because it aligns VAT with actual money entering and leaving the bank account.
Disadvantages of VAT Cash Accounting
While useful for many businesses, there are some drawbacks.
Cannot Reclaim VAT Until You Pay Suppliers
If you purchase equipment or stock on credit, you must wait until payment is made before reclaiming VAT.
Less Suitable for Businesses Paid Immediately
If customers usually pay instantly, there may be little benefit compared to standard VAT accounting.
Turnover Monitoring Is Required
Businesses must monitor turnover carefully to ensure they remain within HMRC’s thresholds.
VAT Cash Accounting vs Standard VAT Accounting
| Feature | Cash Accounting | Standard Accounting |
|---|---|---|
| VAT paid when | Customer pays | Invoice issued |
| VAT reclaimed when | Supplier paid | Invoice received |
| Best for | Cash flow support | Faster VAT reclaim |
| Suitable for | Smaller businesses | All business sizes |
Is VAT Cash Accounting Right for Your Business?
The scheme is often beneficial for:
- Small businesses
- Tradespeople
- Consultants
- Freelancers
- Businesses with late-paying customers
However, every business is different. Some companies benefit more from standard VAT accounting, especially if they regularly reclaim large amounts of VAT.
An accountant can help determine which VAT method is most tax-efficient and practical for your business.
Need Help With VAT or Bookkeeping?
Understanding VAT schemes and staying compliant with HMRC requirements can be difficult for growing businesses.
Clayton Stirling Chartered Accountants supports businesses across Kent with:
- VAT returns
- Bookkeeping
- Payroll
- Self Assessment
- Limited company accounts
- Tax planning and advice
Whether you are registering for VAT for the first time or deciding if the Cash Accounting Scheme is right for you, professional advice can help avoid costly mistakes.
Conclusion
The VAT Cash Accounting threshold currently allows businesses with a VAT taxable turnover of up to £1.35 million to join the scheme, with a leaving threshold of £1.6 million.
For many small UK businesses, the scheme can improve cash flow and simplify VAT management. However, it is important to understand both the benefits and limitations before deciding whether it is suitable for your business.