The VAT Cash Accounting Scheme is a simplified method of bookkeeping whereby income and expenditure are recorded only when payments are actually received or made. This scheme is frequently utilised by sole traders and small businesses due to its straightforward nature and ease of administration, making it particularly suitable for those without a formal background in accountancy. It provides a clear representation of the business’s cash position and is often more cost-effective to operate, as VAT is payable solely on income that has been received. Additionally, it may help to reduce administrative burdens due to its relative simplicity compared to standard VAT accounting methods.

Under the VAT Cash Accounting Scheme, both sales and purchases are recorded on the basis of actual payment rather than invoice date. Therefore, VAT is only payable to HMRC when a customer has made payment, and input VAT may only be reclaimed once payment has been made to the supplier. This approach can assist in managing cash flow more effectively and ensures that VAT returns reflect genuine cash movements within the business.

To be eligible to join the VAT Cash Accounting Scheme, a business must have an estimated taxable turnover not exceeding £1.35 million per annum. The business must also be compliant with all VAT filing and payment obligations, with no record of late submissions or defaults. Should a business’s turnover exceed £1.6 million, it is required to withdraw from the scheme, although voluntary withdrawal is permitted at any time.