VAT Cash Accounting Scheme

Normally the VAT you pay HMRC is the difference between:

• sales invoices (when invoiced)

• purchase invoices (when invoiced)

However if your customer has not yet paid your sales invoice, it may be difficult to find the cash to pay HMRC.

That's why the cash scheme allows you to pay VAT based on:

• when you've been paid by your customers

• when you've paid your suppliers.

See gov.uk for details.

To join the scheme you must:

• have a VAT taxable turnover below £1.35 million for 12 months

• be up to date with all VAT returns and payments.

The scheme can't be used for certain types of transactions (see gov.uk for details).

You must leave the scheme once your turnover goes over £1.6 million in 12 months.

The scheme may be useful if VAT invoices in aged receivables are consistently higher than VAT invoices in aged payables.

In the example below, if the difference between aged receivables and aged payables is consistent or increases, this could mean that VAT due is reduced by £15,000 or more. This reduces the working capital required by the business.