The different VAT accounting methods available to LTDs and Sole Traders
Limited Companies can choose between four VAT accounting methods:
Traditional (accrual) accounting - VAT is due when invoices are issued or received.
Cash accounting - VAT is only due when payment is actually made or received.
Flat rate scheme with cash accounting - Simplified VAT calculation based on turnover when payments are received.
Flat rate scheme with traditional (accrual) accounting - Simplified VAT calculation based on turnover when invoices are issued.
Sole Traders can choose between two VAT accounting methods:
Cash accounting - VAT is only due when payment is actually made or received.
Flat rate scheme with cash accounting - Simplified VAT calculation based on turnover when payments are received.
How cash accounting works
With cash accounting, you only pay VAT to HMRC when your customers actually pay you, and you only reclaim VAT when you pay your suppliers. Traditional VAT accounting differs in that VAT becomes due as soon as an invoice is issued or received, regardless of the payment status.
Cash accounting for VAT can significantly improve your cash flow, especially if your customers typically pay on credit terms.
Who can use cash accounting?
Your business is eligible for cash accounting if your VAT taxable turnover is less than £1.35 million. You do not need to tell HMRC you are joining the scheme.
Additionally, you must:
Be up-to-date with your VAT returns and payments
Not have committed a VAT offence in the last 12 months, for example, VAT evasion
You must leave the scheme if your VAT taxable turnover is more than £1.6 million.
Flat rate cash accounting is a separate scheme. To join the flat rate scheme, you must apply directly to HMRC. The flat rate scheme has separate eligibility conditions, which you can read more about here. Most businesses will apply to join the scheme upon registration; however, if you have already registered for VAT, you can still apply to join the scheme. Speak to your accountant or tax advisor if you’re not sure which scheme is best for you.
Once you have joined the scheme, you can choose whether you would prefer to use traditional accounting or cash accounting, but you must use the method for at least 12 months before switching to a different method.
Switching between VAT schemes
Getting Started
You can switch your VAT scheme at the start of any open VAT period, as long as you are eligible to do so, through Settings > VAT > Edit registration. Our built-in validation ensures you can only select switch dates which align with your VAT return periods, keeping you compliant with HMRC requirements.
What happens when you switch
From traditional to cash accounting: All unpaid invoices at the time of switching, which you haven’t already submitted on a VAT return, will automatically be handled under the new cash accounting rules. You’ll only pay or reclaim VAT when you receive a payment or make a payment.
From cash to traditional accounting: HMRC provides a 6-month transitional period for any unpaid invoices at the time of switching. Our system automatically applies this rule:
If payment occurs within six months, your VAT return will automatically recognise this and treat it correctly.
Any invoices still unpaid after six months will have their VAT settled in accordance with HMRC rules.
From cash accounting to flat rate scheme cash accounting: When moving to FRS with cash accounting, all payments received after the switch date are automatically included in your FRS turnover calculation, following HMRC guidelines.
From flat rate scheme cash accounting to cash accounting: When moving from cash accounting FRS to cash accounting, all payments received after the switch date for invoices issued previously are automatically included in your FRS turnover calculation, following HMRC guidelines.
Is cash accounting right for your business?
Cash accounting typically benefits businesses that:
Offer credit terms to customers
Pay suppliers promptly or on delivery
Want to improve cash flow by aligning VAT payments with actual cash received
Traditional accounting might be better if:
You receive immediate payment from customers (like retail shops or food stalls)
You have extended payment terms with suppliers
You want to reclaim VAT on purchases before actually paying for them
In the scenario where your sales are immediate but your purchases are on credit terms, you’d pay VAT on sales immediately, regardless of the scheme. However, with traditional accounting, you could reclaim VAT on purchases sooner.
Automatic compliance
Rest assured that whichever scheme you choose, our system automatically:
Calculates VAT according to your selected method
Applies relevant HMRC rules during transitions
Handles the six-month rule for scheme changes
Correctly treats all your transactions
Next Steps
Ready to switch? Head to Settings > VAT > Edit to explore your options. The system will guide you through the process and help you select valid dates for any changes you make.
If you’re unsure which scheme would work best for your business, consider consulting with your accountant or tax advisor about your specific cash flow situation and payment patterns.