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

Disclaimer: The content included in this glossary is based on our understanding of tax law at the time of publication. It may be subject to change and may not be applicable to your circumstances, so should not be relied upon. You are responsible for complying with tax law and should seek independent advice if you require further information about the content included in this glossary. If you don't have an accountant, take a look at our directory to find a FreeAgent Practice Partner based in your local area.

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