Many VAT registered business owners use the standard Accrual Accounting Scheme for their Quarterly VAT Returns. However, they may not be aware that there are alternative VAT schemes that have been designed to help small to medium sized businesses, one of which could significantly improve their cash flow.

Accrual Accounting Scheme

The amount of VAT you pay HMRC is usually the difference between the VAT on your sales invoices, and the VAT on your purchase invoices. However, this can cause crippling cash flow problems for businesses whose customers don’t pay their Invoices on time. In this feature we are going to take a look at one of the alternatives, called the Cash Accounting Scheme.

Cash Accounting Scheme

With this scheme your business would pay VAT on sales when your customer pays you, and reclaim VAT on purchases when you have paid your supplier.  This is an enormous help for traders who have to pay their suppliers promptly, but are made to wait a long time before receiving payments from their customers. This scheme also provides automatic relief for VAT on bad debts, because if your customer doesn’t pay, no VAT is declarable (as it would be if VAT was assessable on Invoices rather than payments).

How does a business qualify for this scheme?

  • To qualify for this scheme a business must anticipate turnover of £1.35 million or less. This includes taxable supplies at standard rate (20%), reduced rate (5%) and zero rate, but excludes the VAT itself, and exempt supplies. If a business starts using the cash accounting scheme and annual turnover exceeds £1.35 million, they can carry on using the scheme until annual taxable turnover reaches £1.6 million.
  • The business must have a good track record with HMRC over the last 12 months, having made VAT Returns & Payments on time, and no assessments for VAT evasion.

When registered under this scheme the business will continue to issue VAT invoices but will need to keep specific accounting records;

  • The tax point for payments in cash, cheque, payment card or bank transfer is always the date of the transaction (EG the date on the payment card voucher)
  • A cash book (or equivalent) must be maintained summarising all payments made or received, with a separate column for VAT, suitable for providing data for the VAT Return
  • Invoices issued or received for any payments made in cash must be receipted and dated.

Remigius liaise with HMRC on behalf of our clients, calculate & submit their VAT Returns, and regularly review whether they are on the most suitable VAT scheme. Some HMRC terms & conditions apply, however if you would like to discuss whether your business would benefit from changing VAT schemes, please contact us and we will be very pleased to help.


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