The cash accounting scheme was introduced to help smaller businesses with their finances and to prevent them having to pay over VAT to Revenue and Customs without having first received the proceeds of sales from their customers.

Cash accounting is open to you if you are a registered trader with an expected taxable turnover not exceeding £1,350,000 in the next twelve months. There is no need to apply to use the scheme, but you should start to use it at the beginning of a tax period.

The cash accounting scheme allows businesses to account for its VAT on a receipts basis. Thus, in cases where customers take extended credit, the tax on these sales will not have to be remitted to HM Revenue and Customs until the money has been received.

Similarly under the cash accounting scheme input tax is reclaimed upon the payments made to your suppliers.

The VAT payable or repayable for each accounting period will be the difference between the total amount of VAT included in payments received from your customers and the total amount of VAT included in payments made to your suppliers.

Should your turnover exceed £1,350,000 then there is a 25% tolerance built into the scheme. This means that once you are using cash accounting, you can normally continue to use it until the annual value of your taxable supplies reaches £1,600,000.

You must review your taxable turnover in the year ending at the end of each tax period. If you exceed the tolerance of £1,600,000, you must leave the scheme immediately, unless HM Revenue & Customs allows or directs otherwise.

All outstanding tax must be accounted for within six months of the period in which you leave the scheme.