cash based vatUnravelling VAT: Which Businesses Can Benefit from Cash Basis?

If you’re navigating the intricate world of Value Added Tax (VAT) in the UK, you’ve probably heard about the “cash basis” method. But what exactly is it, and which businesses can use cash basis for VAT? Today, we’re diving into this topic headfirst, demystifying the cash basis approach, and shedding light on which businesses can harness its benefits. So, grab your calculator, and let’s get started!

The Cash Basis for VAT: A Quick Overview

Before we dive into the specifics, let’s get a grasp of what the cash basis method for VAT is all about. In essence, it’s an alternative way of accounting for VAT that focuses on the actual cash transactions your business makes, rather than invoices issued and received.

Here’s a simple breakdown:

  • Cash Basis: You account for VAT when you receive payment from your customers or make payments to your suppliers. No need to worry about unpaid invoices – it’s all about the cash in your bank account.
  • Standard Basis: With this traditional method, you account for VAT based on the date of the invoice – whether or not you’ve been paid.

Which Businesses Can Use Cash Basis for VAT?

Now, let’s unravel the mystery of eligibility. The cash basis for VAT isn’t a one-size-fits-all solution; it’s designed with certain types of businesses in mind. Here are the main criteria:

Small Businesses

If your business’s taxable turnover (the total value of your taxable sales) is less than £1.35 million per year, you’re in luck! You’re eligible to use the cash basis method.

Example: Sarah runs a cozy artisanal soap shop and sells her handmade soaps to local customers. Her annual taxable turnover is £500,000, well below the £1.35 million threshold. Sarah can opt for the cash basis for VAT.

Simplicity Seekers

Perhaps you prefer a simpler approach to your VAT accounting. The cash basis method can be more straightforward, especially if you have irregular cash flows.

Example: David operates a small gardening service. His income varies depending on the season, and he often has clients who pay him several months after completing a job. The cash basis suits David’s business because it aligns with his cash flow.

Cash Flow Control

Using the cash basis can help you manage your cash flow more effectively since you only account for VAT when money changes hands.

Example: Emma owns a small IT consultancy firm. She occasionally takes on projects for larger companies, which often pay her several months after project completion. The cash basis allows Emma to avoid VAT on unpaid invoices, providing better control over her cash flow.

When the Cash Basis Might Not Be Your Best Friend

While the cash basis for VAT offers simplicity and cash flow control, it’s not for everyone. Here are some scenarios where you might want to stick with the standard VAT accounting method:

Larger Businesses

If your taxable turnover exceeds £1.35 million, you won’t be eligible for the cash basis. You’ll need to stick with the standard method.

VAT Reclaim

Some businesses benefit from the ability to reclaim VAT on purchases even before receiving payment from customers. This can be a strategic advantage, especially if your clients have extended payment terms.


If your business has intricate VAT transactions, such as international sales or purchases, the standard method might be a better fit.

The Final Verdict: Expert Guidance

Deciding whether the cash basis for VAT is right for your business can be a crucial financial decision. It’s not a one-size-fits-all solution, and the eligibility criteria are just the beginning. To make an informed choice, it’s wise to seek expert guidance from professionals like Goringe Accountants.

So, if you’re ready to explore the benefits of the cash basis for VAT or need assistance in navigating the VAT landscape, reach out to the experts. They can provide personalized advice tailored to your business needs.

Remember, the world of VAT is complex, but with the right approach, you can keep your finances in check and ensure your business thrives. Happy accounting!