The cash accounting scheme lets a business pay output VAT when customers pay and reclaim input VAT when it pays suppliers, instead of using invoice dates. It helps cash flow for businesses with slow-paying customers. Leaving it creates a one-off adjustment that is easy to miss.
When you have to leave
A business can join while its estimated taxable turnover for the next 12 months is not more than £1.35 million. It must leave if its taxable turnover in the previous 12 months is more than £1.6 million. It must also leave if it is no longer eligible for other reasons, for example if it is expelled for misusing the scheme. A one-off spike can be ignored if turnover in the next 12 months is expected to be below the joining threshold.
A business can also leave voluntarily at the end of any VAT period, for instance when customers start paying faster than suppliers are paid, or before joining another arrangement.
The VAT on outstanding invoices
On leaving, the business switches to invoice-based (accrual) accounting from the start of the next VAT period. Invoices issued and received while in the scheme but not yet paid would otherwise never be taxed. So the business must account for:
- output VAT on all sales invoices still unpaid at the exit date;
- input VAT on all purchase invoices still unpaid at the exit date.
If the business left because it exceeded the threshold, it can choose to account for the net amount over the next six months instead of on the next return. If it leaves voluntarily, the adjustment goes on the return for the period in which it leaves.
Worked example
A contractor leaves the scheme at 30 June. The aged debtors list shows £84,000 of unpaid sales including £14,000 VAT; the aged creditors list shows £30,000 of unpaid purchases including £5,000 VAT.
| Amount | |
|---|---|
| Output VAT on unpaid sales | £14,000 |
| Input VAT on unpaid purchases | £5,000 |
| Net VAT to account for | £9,000 |
On the next return (or spread over six months if the business exceeded the threshold), £14,000 is added to box 1 and £5,000 to box 4. When those customers and suppliers later pay, the payments are not taxed again.
Bookkeeping changes
- Run aged debtor and creditor reports at the exit date and keep them with the return as evidence.
- Change the VAT scheme setting in the accounting software from the first day of the new period, not retrospectively.
- Check the software does not double-count: invoices raised before the change must not be taxed again on payment.
- Review bad debts: under cash accounting no relief was needed; once on invoice accounting, bad debt relief rules apply to the outstanding invoices brought into account.
Moving to another scheme
Businesses moving to the flat rate scheme have their own transitional rule for invoices issued under cash accounting. Check the cash accounting scheme guidance before changing.
For the scheme itself see Choosing the Right VAT Scheme, and for invoice-based relief on unpaid debts, VAT bad debt relief.