The cash accounting VAT scheme
Who benefits, eligibility and how to switch
Under the cash accounting scheme, VAT follows the money rather than the invoice. You account for output VAT only when your customer pays you, and reclaim input VAT only when you pay your supplier.
Who benefits
Cash accounting helps businesses with slow-paying customers. If you invoice in March but do not get paid until May, under standard accounting the output VAT is in the March return. Under cash accounting, it is in the June return. This removes the need to fund VAT before collecting it from customers.
Eligibility and switching
Cash accounting is available to businesses with taxable turnover below £1.35 million. To use it, tell us at registration or when you want to switch. We will check if you are eligible, update your Xero VAT settings to cash accounting and the next return is calculated on the cash basis.
💡 Good to know: The downside of cash accounting is that input VAT on purchases is only reclaimable when paid, not when billed. For most small businesses that pay suppliers promptly, this makes little difference in practice.
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