Cash Accounting Scheme

The HMRC calendar explains how a business may end up paying HMRC a VAT bill, before having collected it from their customers. They are in effect cash flowing HMRC!

For businesses with turnover up to £1.35M (full criteria with HMRC), the business can apply to be run under the cash accounting scheme. Under this scheme, VAT is paid for on the amounts spent and received within the relevant VAT quarter. In other words, the VAT return covers invoices paid and invoices for which payment is received. All other invoices are not relevant to that return. It seems to me that, other than being able to avoid the cash flow issue, this is also an intuitively simpler scheme to understand if you are new to VAT. It also avoids the bad debt claim back, which is covered below.

There is a related issue of VAT flat rate, which I have not covered here.