1. Overview

1.1 What this notice is about

This notice explains how the Cash Accounting Scheme works and the conditions you must meet if you want to use it.

1.2 Cash Accounting Scheme

The next sentence has the force of law under regulations 56 to 65 in VAT Regulations 1995.

You cannot retrospectively apply the Cash Accounting Scheme to your business.

The scheme allows you to account for VAT (output tax) on your sales on the basis of payments you receive, rather than on tax invoices you issue. This is different from the normal rules that require you to account for VAT on your sales when you issue a VAT invoice, even if your customer has not paid you.

However, if you choose to use the scheme, you can only reclaim the VAT incurred on your purchases (input tax) once you pay your supplier. Under the normal method of accounting for VAT you can reclaim VAT on purchases you make as soon as you receive a VAT invoice even if you have not paid your supplier.

1.3 How the scheme can help your business

The scheme could help your cash flow, because in general you do not have to pay VAT to HMRC until your customer has paid you. The scheme will be especially helpful if you give your customers extended credit or suffer a lot of bad debts.

However, the scheme may not give you any benefit if you:

• are usually paid as soon as you make a sale
• regularly reclaim more VAT than you pay
• make continuous supplies of services

If you find the scheme is of no benefit, you can stop using it at the end of a VAT accounting period and return to the normal method of accounting for VAT, for more information read paragraph 6.1.

1.4 Additional rules which have force of law

The rules about cash accounting are set out in the VAT Regulations 1995.

2. Basics of cash accounting

2.1 Eligibility

You are eligible to start using the scheme if you meet the following conditions:

• you expect the value of your taxable supplies in the next year will be £1,350,000 or less ― to work out the value of your taxable supplies read paragraph 2.2)
• you have no VAT Returns outstanding
• you have not been convicted of a VAT offence in the last year
• you have not accepted an offer to compound proceedings in connection with a VAT offence in the last year
• you have not been assessed to a penalty for VAT evasion involving dishonest conduct in the last year
• you do not owe HMRC any money or if you do, you have made arrangements with them to clear the total amount of your outstanding VAT payments (including surcharges and penalties)
• HMRC has not written to you withdrawing use of the scheme during the last year
• HMRC has not written to you and denied you access to the scheme
• you comply with the conditions set out in this notice

2.2 How to work out the value of your taxable supplies for joining the scheme

Your taxable supplies are the value excluding VAT, of standard, lower and zero-rated supplies you expect to make. Do not include the value of any exempt supplies or the value of any expected sale of capital assets.

2.3 How to estimate your future taxable supplies

If you have been registered for less than 12 months, the simplest way is to estimate in the same way you did when you completed form VAT 1: application for registration. You can read VAT 1: application for registration in Register for VAT by post. If you have been registered for 12 months or more, you can use the value of your past year’s taxable supplies as a guide.

If you believe these methods are not a good indicator of your future taxable supplies, you can make the estimate in any reasonable way.

You might use:

• your business plans
• information relating to pre-registration business activity
• business information from a previous owner

2.4 If you estimate that your VAT turnover will not exceed £1,350,000 in the coming year and you are wrong

HMRC will not penalise you for this provided you can show that there were reasonable grounds for your estimate.

If your estimate of turnover had no reasonable estimate HMRC will immediately remove you from the scheme. So it is sensible to keep a record of how the estimate was made.

2.5 What to do if the value of your taxable supplies exceeds £1,350,000

Once you have joined the scheme you may continue to use it until the annual value of your taxable supplies including the disposal of stock and capital assets, but excluding VAT, reaches £1,600,000.

If this figure is exceeded, you will have to leave the scheme at the end of your current tax period and use the normal method of accounting in future.

For example, you must leave the scheme on 30 November and begin paying normal VAT accounting from 1 December if your:

• VAT quarter ends on 30 November
• taxable supplies in the 12 months ending 30 November exceeded £1,600,000

An exception to this rule for one-off sales is explained in paragraph 2.6.

You should monitor the amount of your taxable supplies regularly so that you have time to modify your books and records if you have to leave the scheme.

If you do leave the scheme, you must bring all outstanding VAT to account in accordance with paragraph 6.4.

2.6 If your taxable supplies exceed £1,600,000 because of a ‘one-off’ increase in sales

If you exceed the £1,600,000 limit because of a one-off increase in sales, you may be able to remain on cash accounting on condition that you meet all of the following criteria:

• the one off increase has not happened before and is not expected to happen again, for example, the sale of a capital asset
• the sale arose from a genuine commercial activity
• there are reasonable grounds for believing that the value of your taxable supplies in the next 12 months will be below £1,350,000

You must keep a record of how you came to your decision to remain on the scheme. If HMRC finds that you do not meet all the conditions then they may exclude you from the scheme immediately, or from the date your ineligible use began.

2.7 Using the scheme for all aspects of your business

The next sentence has force of law under regulations 57 and 59 in VAT Regulations 1995.

Depending on the exceptions you must use the Cash Accounting Scheme for the whole of your VAT-registered business.

The following transactions are excluded from cash accounting both to simplify the scheme and assist the cash flow of small businesses:

• goods that you buy or sell under lease purchase, hire purchase, conditional sale or credit sale agreements
• goods imported or acquired from an EU member state (or goods removed from a customs warehouse or free zone), for further information (read paragraph 5.5)
• certain goods and services on which the purchaser must account for output tax on his VAT Return on the suppliers behalf due to the VAT domestic reverse charge (read section 2.8 ― VAT domestic reverse charge)

The following transactions are excluded from cash accounting to prevent abuse of the scheme:

• supplies where you issue a VAT invoice and payment of that invoice is not due in full within 6 months of the date it was issued
• supplies of goods or services where you issue a VAT invoice in advance of making the supply or providing the goods

Transactions excluded from the scheme must be accounted for under the normal VAT accounting rules as explained in VAT guide (VAT Notice 700).

2.8 Using any other schemes when you’re on the Cash Accounting Scheme

You’ll need to read the following information about the Annual Accounting Scheme, VAT domestic reverse charge and Flat Rate Scheme for small business, if you’re using the Cash Accounting Scheme.

Annual Accounting Scheme

If you use the Cash Accounting Scheme you may also be able to use the Annual Accounting Scheme. This scheme allows you to even out your VAT payments as you pay monthly or quarterly instalments based on an estimate of your annual VAT liability. At the end of the year you complete a single VAT Return and pay any balance due. For more information read Annual accounting (VAT Notice 732).

VAT domestic reverse charge

You cannot use the Cash Accounting Scheme for supplies of goods and services that are subject to one of the domestic reverse charges.

You’ll need to read Domestic reverse charge procedure (VAT Notice 735) to find out when you need to apply the reverse charge for supplies of mobile phones, computer chips, emissions allowances, wholesale gas and electricity, wholesale electronic communications, renewable energy certificates.

For supplies of building and construction services you can check when you must use the VAT reverse charge for building and construction services. As a sub-contractor supplying construction services and when most of your sales are covered by the VAT domestic reverse charge it may not be beneficial to use the cash accounting scheme.  This is because if you use the cash accounting scheme you have to wait until you’ve paid for a supply before you can claim back the VAT as input tax.  However,  if you apply the normal rules you can recover the input tax at the date of the invoice.

Flat Rate Scheme for small business

The Flat Rate Scheme cannot be used with the Cash Accounting Scheme but it does have its own cash based method. You read about how to use the Flat Rate Scheme, who can use it and how to apply to join the scheme in Flat rate scheme for small businesses(VAT Notice 733).

3. Starting to use the Cash Accounting Scheme

3.1 How to start to use the Cash Accounting Scheme

The next sentence has force of law under regulations 57 and 59 in VAT Regulations 1995.

You cannot retrospectively apply the Cash Accounting Scheme to your business.

If your business is already registered for VAT and you are eligible to use the scheme (read paragraph 2.1) you may use the scheme from the start of your next VAT period. There is no need to apply to use the scheme but you must avoid accounting for VAT twice on any supplies made or received before you began to use the scheme.

The next paragraph has force of law under regulations 57 and 59 in VAT Regulations 1995. This force of law is designed to avoid you paying (or claiming) VAT twice when you change your method of accounting.

In order to do this you must, from the date you start to use the scheme, identify and separate in your records any payments you receive or make for transactions already accounted for under the normal method of VAT accounting. Exclude such payments from your scheme records.

3.2 How to calculate your VAT due if you’re a new VAT registration

If you use the scheme from the first date of your VAT registration you may be eligible to reclaim, as though it was input tax, VAT on certain purchases made prior to being registered. For more information read VAT guide (VAT Notice 700).

For example, you may be able to reclaim VAT on:

• initial stocks
• tools
• machinery
• office furniture
• other capital equipment

If you choose to use the scheme from the date of your VAT registration, you must recover the VAT on such purchases as follows:

The next 2 sentences have force of law under regulations 57 and 59 in VAT Regulations 1995.

If you have already paid for the qualifying goods and services, reclaim the VAT as though it was input tax on your first VAT Return.

If you pay for the goods or services after you have registered for VAT, claim the VAT, as though it was input tax, in the tax period in which you pay for them.

4. Records and accounting for VAT

4.1 Record keeping

Most of the rules about record keeping are the same whether or not you use the scheme. The normal requirements are contained in VAT guide (VAT Notice 700) and Record keeping (VAT Notice 700/21). However, there are some extra rules that apply only to the Cash Accounting Scheme and these are explained in paragraph 4.2.

Section 4 only gives the general rules that apply to all businesses using the scheme. You must read section 5 of this for details of special rules that apply to particular transactions.

4.2 Special rules for invoices

If you receive payment in coins or notes from a customer you must, if asked, endorse the customer’s copy of your sales invoice with the amount that they have paid and the date it was paid.

Similarly, if you pay a supplier in coins or notes, you must make sure that they endorse your copy of the purchase invoice with the amount you have paid and the date it was paid.

4.3 Other records to keep

The next sentence and bullets have force of law under regulations 57 and 59 in VAT Regulations 1995.

In order to operate the Cash Accounting Scheme, your records must clearly cross-refer payments:

• received by you, or on your behalf, to your corresponding sales invoice
• made by you to the corresponding purchase invoice
• made or received to the normal commercial evidence, such as bank statements, cheque stubs, paying-in slips

The easiest way to do this is to keep a cash book summarising all payments made and received, with separate columns for VAT. Whatever form your records take, they should always be complete and up to date.

If you are in any doubt about how to keep your records, contact the VAT helpline.

4.4 When to account for the VAT on your sales

VAT on your sales (output tax) must be accounted for on the VAT Return for the accounting period in which you receive a payment from your customer. For the purposes of the scheme, the date you are paid depends on the way in which your customer pays you. These are the rules, if you paid by:

• cash (coins or notes) the date you received the payment is the date you were given the money
• giro, standing order or direct debt the date you received the payment is the date your bank account is credited with the payment

The next 4 paragraphs have force of law under regulations 57 and 59 in VAT Regulations 1995.

If you are paid by credit or debit card: you receive payment on the date you make out a sales voucher for the payment (not when you actually receive payment from the card provider).

If the credit or debit card payment is not honoured, then you do not have to account for the VAT. If you have already accounted for the VAT you can adjust your VAT account, or make a refund claim in line with How to correct VAT errors and make adjustments or claims (VAT Notice 700/45). If you later receive a payment for the supply, then you must account for the VAT due on that payment.

If you are paid by cheque: you receive payment on the date you receive the cheque, or the date on the cheque, whichever is later.

If the cheque is not honoured, then you do not have to account for the VAT. If you have already accounted for the VAT you can adjust your VAT account, or make a refund claim in line with How to correct VAT errors and make adjustments or claims (VAT Notice 700/45). If you later receive a payment for the supply, then you must account for the VAT due on that payment.

4.5 When to reclaim VAT charged on your purchases and expenses

Once you start to use the scheme you claim the VAT you incur on your purchases and expenses (input tax) on the VAT Return for the tax period in which you make a payment to your supplier. For the purposes of the scheme the date you pay depends on the way in which you make a payment. You’ll need to follow the rules if you pay by:

• cash (coins or notes) the date you make the payment is the date you pay the money ― you need a receipted invoice to claim back VAT on purchases you have paid for in this way (read paragraph 4.2)
• giro, standing order or direct debit ― the date you make the payment is the date your bank account is debited with such a payment

The next 2 paragraphs have force of law under regulations 57 and 59 in VAT Regulations 1995.

If you pay by credit or debit card: the date of payment is the date a sales voucher is made out for the payment.

If you pay by cheque: the date of payment is the date you send the cheque, or the date on the cheque, whichever is later. If your cheque is not honoured, you cannot reclaim the VAT. If you have already accounted for the VAT you should adjust your VAT account, or make a voluntary disclosure in line with How to correct VAT errors and make adjustments or claims (VAT Notice 700/45).

You can read paragraphs 5.7 to 5.10 for more information relating to payments.

4.6 Partial exemption

If you incur input tax on goods and services that you use or intend to use in the making of exempt supplies, you may not be able to claim all your input tax. This is known as partial exemption. If you are partly exempt, you should read Partial exemption (VAT Notice 706).

Under the normal method of accounting for VAT, businesses who are partly exempt will usually make a calculation to establish the correct amount of input tax claimable, based on purchases and sales made during a tax period.

Partly exempt businesses who use the scheme must base such a calculation on payments made and received in a tax period.

4.7 How to fill in your VAT Return

When you fill in your VAT Return the amounts of VAT due and deductible are based on payments received and made, not on invoices issued. For the purposes of the scheme the ‘Value of outputs’ and the ‘Value of inputs’ are the amounts of payments you have received or made exclusive of VAT.

If you are registered for VAT in Northern Ireland and make supplies to an EU member state the amount you put in box 8 of the VAT Return should be the total value of all supplies of goods and services made, exclusive of VAT, and not the total of payments received.

5. Special rules for particular transactions

5.1 Deposits

The rules about deposits are in VAT guide (VAT Notice 700). If you receive or pay a deposit which serves as an advance payment, you must account for it in accordance with the rules in paragraphs 4.4 and 4.5.

VAT does not apply to deposits taken as a security to make sure the safe return of goods, whether you refund it upon return of the goods or retain it to compensate you for loss or damage.

5.2 Payments collected by agents on your behalf

The next paragraph has force of law under regulations 57 and 59 in VAT Regulations 1995.

If an agent collects payments on your behalf, you must account for VAT on the supply in the VAT period in which your agent collects payment from your customer.

The value on which VAT is due, is the amount of the taxable debt that the agent collects from your customer, not the amount of credit given to you by the agent (read paragraph 5.8).

5.3 Factoring

The next paragraph has force of law under regulations 57 and 59 in VAT Regulations 1995.

Recourse agreements (that is where you remain responsible for bearing any loss resulting from an unpaid debt)

If you have assigned to a factor a debt in respect of a taxable supply you have made while using the Cash Accounting Scheme, you must account for output tax on the supply in the VAT period in which your factor collects payment from your customer.

The value, on which VAT is due, is the amount that the factor collects from your customer in relation to taxable supplies, not any lesser amount paid to you by the factor (read paragraph 5.8). If the factor is unable to collect all (or part) of the debt, then you must account for that amount under the normal rules, in line with paragraph 4.4.

Non-recourse agreements (that is where the factor accepts the risk of any loss resulting from your customer’s debt)

If you have assigned to a factor a debt in respect of a taxable supply you have made while using the Cash Accounting Scheme, you must account for output tax on the supply in the VAT period in which your factor collects payment from your customer.

The value on which VAT is due, is the amount that the factor collects from your customer in relation to taxable supplies, not any lesser amount paid to you by the factor (read paragraph 5.8).

If the factor is unable to collect all (or part) of the debt on your behalf, then you must account for output tax on the uncollected element of the debt, in the period in which any advance made against that debt is written off by the factor.

If, however, the factor re-assigns all or part of the debt back to you under a recourse clause, then you may be able to claim bad debt relief, depending on paragraph 6.6.

5.4 Selling debts

The next paragraph has force of law under regulations 57 and 59 in VAT Regulations 1995.

If you sell a debt for a taxable supply you made while using the Cash Accounting Scheme, you must account for VAT on the supply in the VAT period in which the debt is sold.

You must account for the output tax on the full value of the supply, to which the debt relates, not on any lesser amount which you receive when you sell the debt.

5.5 Imports and acquisitions

The next sentence has force of law under regulations 57 and 59 in VAT Regulations 1995.

You cannot use the Cash Accounting Scheme for goods you import, acquire from a business registered in an EU member state or remove from a customs warehouse or free zone.

You must account for VAT on such purchases under the normal VAT rules as explained in VAT guide (VAT Notice 700). You can, however, use the scheme to account for VAT on the onward supply of such goods.

Find out more about paying VAT on imports from outside the UK to Great Britain and from outside the EU to Northern Ireland.

5.6 Exports

If you’re registered for VAT in Northern Ireland, use the scheme and export goods or despatch them to an EU member state but do not receive the evidence of export or supply within the time limits allowed, you must account for the VAT that becomes due. This means that you account for VAT on any payments already received.

If you receive further payments for such goods you must account for VAT on these payments when you receive them.

If you later obtain evidence of export or supply you can then zero rate the supply and adjust your VAT account for the tax period in which you obtained the evidence.

Full details of the VAT documentary evidence of export requirements are in Goods exported from the UK (VAT Notice 703) or, for retail exports, Retail Export Scheme (VAT Notice 704).

Further information regarding acquisitions from, and despatches to, EU member states can be found in VAT on movements of goods between Northern Ireland and the EU.

5.7 Part payments

This section explains what to do if you receive part payment for an invoice in circumstances where you still expect to receive the rest of the payment. Paragraph 5.8 describes part payments where your customer has made a deduction before paying your invoice.

The next 2 paragraphs have force of law under regulations 57 and 59 in VAT Regulations 1995.

You must allocate the payment to the invoices in the order in which you issue or receive them if you make or receive payments which:

• are a partial payment of an invoice
• cover more than one invoice
• relate to an invoice for supplies at different rates of tax

Where you make or receive partial payment of an invoice and VAT is not identified separately you must treat the payment as VAT inclusive. Where you make or receive payments which relate to an invoice for supplies at different rates of tax you must apportion the amount paid or received between the different rates and treat the amounts on which VAT is due at the standard or lower rate as VAT inclusive.

Examples of how to account for part payments are described in section 8.

5.8 Payments received net of deductions

The next paragraph has force of law under regulations 57 and 59 in VAT Regulations 1995.

If you receive a net payment you must account for VAT on the full value of taxable supplies made by you before such deductions. This will usually be the value shown on your VAT invoice, you do not include any amounts that are for supplies that do not attract VAT.

Some examples of payments that you may receive that are net of deductions are payments:

• where commission has been deducted by your customer
• where commission or payment for expenses has been deducted by a factor or agent collecting money on your behalf (read paragraph 5.2 and paragraph 5.3)
• where commission or payment for expenses has been deducted by an auctioneer selling goods on your behalf
• made by an employer or contractor who has deducted Income Tax

5.9 Payments in kind (for example, barter, part exchange)

The general rules about payments in kind are in VAT guide (VAT Notice 700).

If you pay or are paid fully or partly in kind, such as by barter or part exchange, you must still account for VAT each time you make or receive a ‘payment’. You receive or make ‘payment’ on the date you receive or supply the goods or services agreed instead of money.

You must account for VAT on the full tax value of the supply which is usually the price, excluding VAT, which a customer would have to pay for the supply if they had paid for it with money only.

5.10 Payments received and made in a foreign currency

If you issue VAT invoices in a foreign currency, you must follow the rules in the relevant paragraphs of VAT guide (VAT Notice 700). If the invoice is paid in full, you will not need to convert the foreign currency payment into sterling for the purposes of the scheme. You must always declare the sterling amount of VAT due on the supply as shown on the invoice.

5.11 Partial payments

If you receive a partial payment in a foreign currency against an invoice expressed in a foreign currency and sterling you will need to calculate the amount of VAT included in the payment by determining what proportion of the total amount due on the invoice is being paid and applying that proportion to the total VAT due.

For example, if the payment in the foreign currency represents half of the total foreign currency amount due on an invoice, you must declare half of the sterling VAT figure as shown on the invoice.

If you receive a partial payment in sterling only, you will need to convert the foreign currency payment into sterling using one of the methods outlined in VAT guide (VAT Notice 700). For the purposes of the scheme, you must be consistent in the method used. But whatever method you adopt, the exchange rate to be used is that current at the time of the supply by you. This may not be the same as the exchange rate which applies at the time you receive payment. Once you have established what the sterling equivalent of the foreign currency payment is and what proportion of the total sterling amount due this represents, you can then determine how much of the payment is VAT.

The rules also apply if you pay for supplies from other UK businesses in a foreign currency.

This section cannot deal with all the possible situations you may encounter. If you have difficulty in dealing with a transaction contact the VAT helpline.

5.12 If the price agreed for a supply changes

Any increase or decrease in the price must be evidenced by the issue of a credit or debit note.

Where a further payment or refund is then received or made, this should be recorded in your payment record as normal.

For information on credit notes read VAT guide (VAT Notice 700).

6. Leaving the scheme

6.1 If you want to leave the scheme

The next sentence has force of law under regulations 57 and 59 in VAT Regulations 1995.

You can only leave the scheme at the end of a tax period.

You must then use the normal method of accounting for VAT from the beginning of the next tax period. You must bring all outstanding VAT to account in line with paragraph 6.4.

6.2 When to stop using the scheme

You must stop using the scheme if:

• you cannot comply with the record keeping requirements set out in this notice
• during a period of one year (ending at the end of a tax period) the value of your taxable supplies, including disposal of stock and capital assets but excluding VAT, exceeds £1,600,000
• HMRC writes to you withdrawing use of the scheme
• you are convicted of a VAT offence
• you accept an offer to compound proceedings in connection with a VAT offence
• you are assessed to a penalty for VAT evasion involving dishonest conduct

6.3 Rejoining the scheme after leaving it

If you leave the scheme voluntarily or because the value of your taxable supplies exceeded £1,600,000, you may begin to use the scheme again from the start of a tax period, provided you are eligible as detailed in paragraph 2.1.

6.4 How to account for VAT if you leave the scheme voluntarily or because your turnover has exceeded the ceiling

When you leave the scheme there may be supplies that you have made for which you have not been paid and as a result you have not accounted for any VAT. You will need to account for this VAT even if you have not been paid by the customer. There may also be cases where you have not paid your suppliers and you have not yet claimed your input tax. You are entitled to claim this input tax subject to the normal VAT rules. You may choose either to:

• account for all your outstanding VAT due in the period in which you stop using the scheme ― this may be simpler but could have a serious effect on your cash flow if the amounts of unpaid VAT on supplies you have made are high
• opt for a further 6 months in which to account for the outstanding VAT

You cannot opt for a further 6 months in which to account for the outstanding VAT if:

• HMRC has withdrawn use of the scheme from you
• the value of your taxable supplies has exceeded £1,600,000 and the value of your supplies made in the previous 3 months totalled more than £1,350,000

You do not need to notify HMRC which method you have chosen.

6.5 How to account for VAT if you use the 6-month option

To avoid double accounting you will need to keep your normal cash accounting records for the supplies you made and received while you used the scheme. In particular you will need to keep a record of payments you make and receive during the 6 months. In addition, you will need to keep separate records required under normal VAT accounting for new supplies you make and receive after you left the scheme.

6.6 Accounting for outstanding VAT on bad debts when you leave the scheme

One advantage of the Cash Accounting Scheme is that you do not have to account for VAT on bad debts. However, if you stop using cash accounting, you have to account for VAT on supplies you have made and received even if they have not been paid for (read paragraph 6.4).

If you have not received any payment then you may be able to claim relief for your bad debts which meet the conditions of the Bad Debt Relief Scheme.

The key conditions are:

• that it is 6 months from the date on which the debt became due and payable or the supply was made, whichever is later
• you can provide evidence that the bad debt has been written off in your ‘refunds for bad debts’ account
• for supplies made prior to 1 January 2003, where your customer is registered for VAT, you have notified your customer of your claim for bad debt relief

For more information read Relief from VAT on bad debts (VAT Notice 700/18).

6.7 If use of the scheme is withdrawn or you’re told you cannot use the scheme

You will be advised in writing if we decide to deny you access or withdraw use of the scheme from you. If you are using the scheme the letter will specify when you must stop using the scheme and when you must account for the outstanding tax due on supplies made and received while using the scheme (further details on how to do this are in paragraph 6.4).

If you disagree with the decision to deny you access to the scheme or withdraw use of the scheme, you may ask HMRC to reconsider.

You should do this within 30 days of the date of the decision and you should let HMRC know if you:

• think that there are facts that may not have been fully considered
• can provide further information

6.8 Disagreeing with HMRC’s decision

You can also appeal to an independent tribunal.

The leaflet HM Revenue and Customs decisions: what to do if you disagree tells you what to do.

6.9 Continuing using the scheme if you’ve appealed to a VAT tribunal

You must not use the scheme until your appeal is resolved if you have appealed to a VAT tribunal about a decision to:

• deny you access to use the scheme
• withdraw use of the scheme on the grounds of protection of the revenue
• not to allow you to continue to use the scheme once you have exceeded the tolerance

If you have appealed against any other matter, then HMRC will normally allow continued use of the scheme, pending the outcome of the appeal. However, if HMRC considers that an appeal facilitates manipulation of the scheme, they may withdraw use of the scheme for the protection of the revenue and you will not be able to use it until the appeal is settled.

6.10 If you cease trading

If you cease trading, you may continue to use the scheme while you dispose of any remaining stocks or assets. Once your VAT registration is cancelled you must follow the rules in paragraph 6.12.

6.11 If your business becomes insolvent

If your business becomes insolvent, you will need to account on your pre-insolvency VAT Return for all VAT on supplies made and received by you before the date of your insolvency which has not yet been accounted for under the scheme.

Where trading continues after the relevant date, the office holder responsible for the business may continue to use the scheme subject to the rules set out in this notice.

The next paragraph has force of law under regulations 57 and 59 in VAT Regulations 1995.

If the office holder does continue to use the Cash Accounting Scheme they must, from the date of insolvency, separate in the business records any payments the business receives or makes for transactions already accounted for on the pre-insolvency VAT Return.

Further details relating to insolvency matters are in Insolvency (VAT Notice 700/56).

6.12 If you deregister

You will have 2 months to submit your final return after you deregister. On this return you must account for all outstanding VAT on supplies made and received prior to deregistration.

This applies even if you have not been paid, but you can also reclaim any VAT provided that you have the VAT invoices. If some of the outstanding VAT relates to bad debts you may claim relief as detailed in paragraph 6.6.

You may also need to account for VAT on the value of any stocks and assets you still have. For more information read Cancelling your VAT registration (VAT Notice 700/11).

7. Transfer of a going concern

7.1 If you sell or buy a business as a going concern and the VAT registration number has not been transferred

Where the whole of a business which uses the scheme is transferred as a going concern and the existing owner cancels the VAT registration of that business, they must follow the rules in paragraph 6.12. The new owner can then choose, subject to eligibility, whether or not to use the scheme.

7.2 If you sell or buy as a going concern a business which is using the scheme and the VAT registration number has been transferred

The next sentence has force of law under regulations 57 and 59 in VAT Regulations 1995.

If you sell your business as a going concern and the new owner takes over your VAT registration number, you must advise the new owner that you are using the Cash Accounting Scheme.

The new owner must continue to operate the scheme and account for payments for supplies and purchases made by the previous owner, as if the new owner had made them.

If the new owner does not want to continue to use the scheme, they must leave the scheme as soon as possible and follow the rules in paragraph 6.4.

You must account for outstanding VAT on the return for the tax period in which the new owner stopped using the scheme.

If only part of a business is transferred as a going concern, you should contact the VAT helpline.

8. Accounting for part payments

When reading this section you’ll need to refer to paragraph 5.7.

8.1 Examples of accounting for VAT when a part payment is made against one invoice

Invoice A shows the standard-rated goods as £1,000.00 and the VAT charge £200.00, the total cost £1,200.00

The steps you’ll need to follow:

1.If a payment of £780.00 is made against invoice A, you need to decide what percentage of that payment represents VAT. You can work out the percentage using the calculation:

(Amount of money received ÷ Total invoice amount) × 100 =

For example

(£780.00 ÷ £1,200.00) × 100 = 65%

The calculation shows 65% of VAT due

2.Multiply the amount of VAT charged by the percentage calculated at Step 1.

For example

£200.00 × 65% = £130.00

In this example £130.00 of the £780.00 payment received should be accounted for as VAT.

The remaining £70.00 VAT still due to HMRC (£200.00 - £130.00 = £70.00) should be accounted for when further payment is received.

8.2 Accounting for VAT on a single payment made against more than one invoice, or against invoices for supplies at different rates of tax

Invoice B shows the standard-rated goods as £1,000.00 and the VAT charge £200.00, the total cost £1,200.00.

Invoice C shows the standard-rated goods as £2,000.00, zero-rated goods £1,000.00 and the VAT charge £400.00 and the total cost £3,400.00.

If a payment of £2,730.00 is made against invoices B and C which does not relate to any particular supply you should allocate it as follows:

1. Allocate £1,200.00 of the £2,730.00 to the earliest supply, invoice B, and account for VAT of £200.00.

The balance of the payment of £1,530.00 (£2,730.00 minus £1,200.00 = £1,530.00) should then be allocated against the later supply, invoice C, as follows:

2.Calculate what percentage of the remaining £1,530.00 represents VAT against invoice C.

(Remaining amount of money available ÷ Total amount still owed to you (that is invoice C) × 100 = Percentage of invoice paid.

For example

(£1,530.00 ÷ £3,400.00) × 100 = 45%

3.Multiply the amount of VAT due on invoice C by the percentage calculated at Step 2.

For example

£400.00 × 45% = £180.00

In this example £380.00 (£200.00 + £180.00 = £380.00) of the £2,730.00 payment should be accounted for as VAT against the £600.00 VAT due.

(£200.00 + £400.00 = £600.00)

The remaining £220.00 VAT still due (£600.00 - £380.00) should be accounted for when you receive further payment.

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