Most creative business owners hear about the cash accounting scheme for VAT and think:
“Sounds great — I only pay VAT when my clients actually pay me.”
And yes, that’s true… but there’s a bit more to the story.
Here’s a clear, jargon-free guide to how it works, when it helps, when it hinders, and why I don’t personally use it in my own practice (even though I recommend it for many clients).
Under normal VAT rules (the invoice or accruals basis), you account for VAT based on the date you raise your invoices, not when the cash arrives.
On the cash accounting scheme, VAT is based on when you get paid.
If a client pays you late, you pay VAT late.
If they take forever, so does the VAT.
To use it, your business must:
That’s the rulebook done. Now let’s talk about the real-world impact.
This is the headline benefit. You don’t have to hand HMRC cash you haven’t yet received. For businesses with slow-paying clients (hello, agency retainers and 90-day editorial payment cycles), this can be a lifesaver.
If a client never pays, you never pay VAT on that invoice.
On the standard scheme, you do — and then claim it back months later. With cash accounting, that problem simply disappears.
If your bookkeeping is fairly straightforward, cash accounting often ‘feels’ more intuitive because it mirrors your bank movements.
Once your turnover pushes near the limits, you have to keep an eye on whether you need to leave the scheme — and switching out is rarely neat.
Things like imports, domestic reverse charge and some capital purchase rules override the scheme. It’s not complicated, but it does mean you need to know where the boundaries are.
Creative business owners often already struggle with forecasting. Cash accounting can make your management accounts lumpy and unpredictable, especially if large invoices straddle VAT quarters.
Even though I help lots of creative clients use it when appropriate, I prefer to keep my own records on the invoice (accruals) basis.
Here’s why:
But most importantly…
Here’s something very few business owners are told:
You can switch from the accruals basis into the cash accounting scheme at the start of any VAT quarter.
If you ever hit a point in the year where cash is tight, this switch can dramatically reduce your VAT bill for that quarter, because VAT becomes due only when you receive the money, not when invoices were raised.
It’s a one-time lever that can create breathing room when you need it.
If you later decide to switch back to invoice-date accounting, you’ll take a cashflow hit when all the timing differences reverse.
So it’s not something to use lightly, but it is a very real strategic tool.
It can be a great fit for:
It’s less suitable for:
VAT isn’t just a compliance chore, it’s a cashflow system.
If you use it strategically, it can smooth out your financial year instead of adding stress to it.
If you’re unsure which approach suits your creative business, I can review your figures, your billing patterns and your cashflow needs, and help you make a decision that works for both now and the future.