What is cash accounting for VAT?

Definition of cash accounting for VAT

Cash accounting is one way, available to most small businesses, to add up your VAT for your VAT return. It means that you will pay VAT to HMRC when customers have paid you.

Cash accounting is an alternative to invoice accounting.

How cash accounting for VAT works

When you are cash accounting for VAT, you pay VAT to HMRC only once you have been paid by your customers. Conversely, you can only reclaim VAT once you have paid your suppliers.

Cash accounting is generally kinder to small businesses than invoice accounting, unless your customers always pay you on time and you don't pay your suppliers straight away. Retailers often do not use cash accounting.

You can start cash accounting for VAT if your VATable sales are under £1.35million a year and you haven't been convicted of a VAT offence in the last 12 months, and you're up to date with your VAT returns and payments.

The VAT flat rate scheme has its own cash-based method, which works very similarly to ordinary cash accounting.

Example of cash accounting for VAT:

Take for example a business that is cash accounting for VAT, and prepares VAT returns to the quarters ending 31st March, 30th June, 30th September and 31st December.

If the business issues an invoice dated 1st March 2014, and the customer pays for on 1st April 2014, this invoice will go on the VAT return to 30th June 2014, because that is the quarter in which the invoice was paid.

Got questions? Ask Emily!

FreeAgent's Chief Accountant Emily Coltman is available to answer your questions in the comments.

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