A UK VAT-registered business currently estimates its taxable turnover for the next 12 months at £1.2 million and wants to join the Cash Accounting Scheme so it accounts for VAT based on cash received and paid rather than invoice dates. Under HMRC's Cash Accounting Scheme rules in VAT Notice 731, can it join, and what would later force it to leave?
- Yes, it can join because its estimated turnover is below the £1.35 million entry limit; it would have to leave once its actual taxable turnover exceeds £1.6 million
- No, it cannot join because the Cash Accounting Scheme is only available to businesses that also use the Flat Rate Scheme
- Yes, it can join, but only if it agrees to keep issuing VAT invoices on the same day goods or services are supplied
- Yes, it can join, but it would have to leave as soon as turnover exceeds the same £1.35 million figure used to enter the scheme
Why A? And why not the others?
Correct answer: A. Yes, it can join because its estimated turnover is below the £1.35 million entry limit; it would have to leave once its actual taxable turnover exceeds £1.6 million
HMRC allows a business to join the Cash Accounting Scheme if it expects its taxable turnover for the next 12 months to be £1.35 million or less, which this business satisfies at an estimated £1.2 million, but it must then leave the scheme once its actual taxable turnover exceeds the higher £1.6 million exit threshold, a deliberately separate and higher figure from the entry limit. The option restricting the scheme to Flat Rate Scheme users is wrong because the Cash Accounting Scheme and the Flat Rate Scheme are independent schemes with their own separate eligibility rules, and a business does not need to use one to access the other. The option requiring same-day invoicing misunderstands the scheme entirely: cash accounting exists precisely so that VAT timing follows cash movements rather than invoice dates, so it does not impose extra invoicing speed requirements. The option claiming the exit threshold matches the £1.35 million entry figure ignores that HMRC deliberately sets a higher £1.6 million exit threshold so that a business does not have to leave the moment turnover creeps slightly above the level at which it originally joined.
Source: GOV.UK: Cash Accounting Scheme (VAT Notice 731)