VAT Cash Accounting Scheme

Overview

Cash accounting enables a business to account for and pay VAT on the basis of cash received and paid, rather than invoices issued and received.

Key points

• Calculate VAT on the basis of when your invoices are paid
• Easier on your cash flow
• Simple to calculate
• Ideal for smaller to medium sized businesses with restricted cash-flow
• Available only if your taxable turnover is less than £1.35 million

Eligibility

You can join the scheme if:

• your business is registered for VAT
• your estimated VAT taxable turnover is £1.35 million or less in the next 12 months (VAT taxable turnover is the total of everything sold that is not VAT exempt)
• are up to date with VAT returns
• have paid over all VAT due to HMRC
• have not been convicted of any VAT offences in the previous year

Once annual taxable turnover exceeds £1.6 million, the business must leave the scheme immediately.

How to join the scheme

You must be eligible to join the scheme. You join at the beginning of a VAT accounting period.

You do not have to tell HMRC you use cash accounting.

How to leave the scheme

You can leave the scheme at any time, but you must leave if you are no longer eligible to use it. You should leave at the end of a VAT accounting period.

You do not have to tell HMRC you’ve stopped using it, but you must report and pay HMRC any outstanding VAT (whether your customers have paid you or not).

You can report and pay the outstanding VAT over 6 months.

If your VAT taxable turnover exceeded £1.35 million in the last 3 months you must report and pay straight away.

You must pay immediately if HMRC has written to you to withdraw your use of the scheme.

How to switch from Cash to Accrual VAT in Xero

• Complete and file all VAT returns for all periods before the date of your scheme change.
• Change your VAT scheme to Accrual Scheme in your financial settings.
• Run your VAT return for your first period using the accrual scheme.
• Run the Aged Receivables Detail and Aged Payables Detail reports as at the day before your scheme change. In each report, under Columns, select Outstanding VAT, then click Update to include a column for VAT. Check for unpaid invoices and bills that you need to account for in your current VAT return.
• If you find invoices and bills that haven’t been included in a previous VAT return, note the amounts so you can adjust your current return.
• Adjust your current VAT return box amounts by only using non-posting adjustments.
• File your MTD VAT return with HMRC.

Once you’ve run one return under the new scheme, you can run all future VAT returns as per usual.

Conclusion

Most small to medium sized businesses will adopt the cash accounting method when registering for VAT. You can always switch methods later, but you must inform HMRC. With modern cloud based accounting software it is very easy to calculate and file your VAT returns for either cash or accrual VAT.