11. Cash accounting

What cash accounting is and how it is affected by insolvency.

11.1 What cash accounting is

The Cash Accounting Scheme allows VAT-registered businesses with a turnover limit up to £1.35 million, to account for VAT on the basis of payments received and made rather than on tax invoices issued and received.

Read Cash Accounting Scheme (Notice 731) for information about how the scheme operates.

11.2 How insolvency affects cash accounting

The office holder is responsible for the Cash Accounting Scheme adjustment described in section 11.3.

The office holder responsible for the business may use the scheme in the post relevant period if the insolvent business was eligible to use the scheme pre-insolvency and continues to be eligible to do so. This may be appropriate in cases when trading has continued after the relevant date.

11.3 Post-insolvency cash accounting adjustment

The cash accounting regulations were amended with effect from 3 July 1997.

For insolvencies:

  • prior to 3 July 1997 — the office holder will be required to account for tax on all supplies made or received in the 6 months immediately prior to the relevant date which have not already been accounted for
  • on or after 3 July 1997 — tax must be accounted for, within 2 months of the relevant date, on all supplies made and received up to the date of the insolvency which has not previously been accounted for

For businesses in:

  • administration
  • voluntary arrangements
  • deeds and schemes of arrangement
  • county court administration orders

When the relevant date falls:

  • on or after 1 January 1998 — tax must be accounted for on all supplies made and received up to the date of the insolvency
  • prior to 1 January 1998 — no adjustment at the relevant date is required

This tax should be entered on the VAT Return for the period immediately preceding the relevant date, and is treated as a liability arising before the insolvency.