VAT Cash Accounting Scheme

Why a business chooses it

The scheme is about cash flow. Under standard accounting, a business that invoices on 30-day terms or chases late payers funds the VAT from its own money until the customer pays. Under cash accounting, the VAT is paid only after the money has arrived.

It also takes care of bad debts. Notice 731 says: “One advantage of the Cash Accounting Scheme is that you do not have to account for VAT on bad debts.” A customer who never pays never triggers the VAT, so there is nothing to reclaim later.

The cost is on the purchase side. A business that buys a lot on credit, or has large up-front expenses, waits longer to reclaim its input VAT. A business that is usually paid before it pays its suppliers gains less from the scheme than one that waits weeks to be paid.

The UK rules

GOV.UK’s guide says you can use the scheme if “your estimated VAT taxable turnover is £1.35 million or less in the next 12 months,” and that you must leave “if your VAT taxable turnover is more than £1.6 million.” You cannot use it if you use the VAT Flat Rate Scheme, which has its own cash-based turnover method, if you are not up to date with your VAT returns or payments, or if you have committed a VAT offence in the last 12 months.

Joining takes no form. In GOV.UK’s words: “You join at the beginning of a VAT accounting period. You do not have to tell HM Revenue and Customs (HMRC) you use cash accounting.” Notice 731 adds: “You cannot retrospectively apply the Cash Accounting Scheme to your business.”

Some transactions stay on standard accounting even inside the scheme. The guide lists invoices with payment terms of 6 months or more, invoices raised in advance, goods bought or sold on lease purchase, hire purchase, conditional sale or credit sale, goods imported into Northern Ireland from the EU, and goods moved outside a customs warehouse. Notice 731 also excludes domestic reverse charge supplies.

Leaving has its own rule. Notice 731 says: “You can only leave the scheme at the end of a tax period.” When you leave, the VAT on sales and purchases not yet paid becomes due, and the guide says you can “report and pay the outstanding VAT over 6 months,” unless your turnover went over 1.35 million GBP in the last 3 months, in which case it is due straight away.

What counts as the payment date

Under the scheme, the payment date decides the return, and Notice 731 defines it by payment method. For a cheque it is “the date you receive the cheque, or the date on the cheque, whichever is later.” For a giro, standing order or direct debit it is “the date your bank account is credited.”

Cards follow a different rule: “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).” HMRC does not name payment processors, but the logic points one way for a Stripe card payment: the date the customer’s card was charged, not the date the money arrives in a Stripe payout two or more days later. At a quarter end, those two dates can fall in different periods. Agree the approach with your adviser and apply it consistently.

If an agent collects on your behalf, Notice 731 says you account for the VAT “in the VAT period in which your agent collects payment from your customer.”

The EU basis and the “Cash accounting” mention

Article 66 of Directive 2006/112/EC is the option that lets a member state tie the tax point to payment. Its derogation does not apply to services where the customer accounts for the VAT under the reverse charge in Article 196, so a cross-border B2B service stays on the normal rules.

Article 167a lets a member state go further on the customer side, postponing the right to deduct input VAT for a business on cash accounting “until the VAT on the goods or services supplied to him has been paid to his supplier.” A member state that uses this optional scheme must set a turnover threshold, which “may not be higher than EUR 2 000 000.”

Article 226(7a) then puts a mention on the invoice: where the VAT becomes chargeable when payment is received under Article 66(b) and the right of deduction arises when the deductible tax becomes chargeable, the invoice must carry “the mention ‘Cash accounting’.” It tells the customer that its own deduction waits for the supplier’s tax point. A Stripe invoice doesn’t add that wording by itself. If your country’s scheme requires it, put it in the invoice footer or a custom field in your Stripe invoice settings. Notice 731, the UK guidance, does not ask for one.

Why Stripe’s tax report follows invoice timing

Stripe’s tax reports documentation is direct about when tax is counted: “Stripe Tax records tax when the invoice finalizes, before payment. A failed or canceled payment doesn’t decrease the total tax reported.” To bring the figure down, Stripe says to “void the invoice, mark it as uncollectible, or create a credit note.”

That is invoice-basis timing. For a Checkout payment, the invoice and the payment happen together, so the two methods agree. For Stripe Billing invoices sent on payment terms, or subscription renewals that fail and succeed on a retry days later, they don’t. An invoice finalized on 28 March and paid on 4 April is in Stripe’s first quarter and, under cash accounting, in your second.

The data to fix it is on the invoice. Its status_transitions object records the finalized_at and paid_at times, and paid_at is the date that matters under the scheme. An invoice that is never paid never enters a cash accounting return, even though Stripe’s report includes its tax until you void it, mark it uncollectible or credit it.

Cash accounting in your QuickBooks books

Two settings are easy to confuse. The first is the accounting method for your reports: QuickBooks Online lets you set the company to cash or accrual under Settings, Account and settings, Advanced, and you can switch an individual report between the two. That changes how reports present income and expenses. It does not tell HMRC anything.

The second is the VAT scheme. QuickBooks Online’s UK VAT settings ask you to choose between Standard (accrual) and Cash. That choice decides which period each sale’s VAT is reported in, and it should match the scheme you actually use with HMRC.

For a Stripe business, the practical check each quarter is a reconciliation between three figures: the VAT on invoices Stripe finalized in the period, the VAT on payments received in the period, and the VAT on your QuickBooks return. Under cash accounting, the second is the one that goes to HMRC. The difference between the first two is VAT on invoices still unpaid, which stays in your VAT liability account until the customer pays or the invoice is written off.