Under standard VAT accounting, VAT is payable on sales whether or not the customer has paid and can lead to a claim for Bad Debt Relief. Under the Cash Accounting Scheme, VAT does not need to be paid over until the customer has paid.
A business can enter this scheme provided their estimated VAT taxable turnover for the next VAT year is not more than £1.35 million. The business can continue to use the scheme until their VAT taxable turnover exceeds £1.6 million.
Businesses can’t use the Flat Rate Scheme together with the Cash Accounting Scheme. However, the Flat Rate Scheme has its own cash based method for calculating turnover. Businesses are also ineligible to use the scheme if they are behind with their VAT payments, late filing returns or have committed a VAT offence in the last 12 months.
Businesses do not need to complete an application form or advise HMRC to start using the Cash Accounting Scheme. They can commence using the Cash Accounting Scheme at the beginning of any VAT period or if they are not already registered for VAT from the day their VAT registration starts.
Businesses can leave the Cash Accounting Scheme voluntarily at the end of any VAT accounting period. They do not need to notify HMRC. They can then re-join the scheme at the beginning of any VAT accounting period, provided they continue to meet the necessary criteria.
Source: Informanagement