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HMRC internal manual

VAT Cash Accounting Scheme Manual

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HM Revenue & Customs
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Cash accounting scheme: Introduction: Law

EC Law

The scheme is a measure permitted under Article 395 of the Principal VAT Directive, which allows Member States to introduce special measures that simplify procedures for charging tax, provided that it doesn’t, except to a negligible extent, affect the overall amount of the tax revenue of the Member State collected at the stage of final consumption.

The scheme was introduced by way of a time-limited derogation from Article 167 of the Principal VAT Directive. Requests to extend the original derogation have been made and granted by the EC Commission periodically.

Under Article 167, the right to deduct input tax arises at the time when the deductible input tax becomes chargeable. This is normally when the VAT invoice, which shows the tax charged, is issued. The derogation from this provision enables the UK to allow deduction of input tax, for businesses using the Cash Accounting scheme, only when payment is made for the supply.

The requirement to defer output tax until payment is received is permitted, without formal derogation, under Article 65.

UK Law

Section 25(1) and paragraph 2(7) of Schedule 11 of the VAT Act 1994 provide the power for HMRC to make Regulations to introduce a Cash Accounting scheme.

The VAT Regulations 1995 Part VIII (Regulations 56-65) set out the Cash Accounting scheme rules. Regulation 57 allows HMRC to publish a Notice which may contain additional rules to those laid down in Regulations 56-65.

Regulation 57 describes the scheme thus:

A taxable person may, subject to this Part and to such conditions as are described in a notice published by the Commissioners, account for VAT in accordance with a scheme (hereinafter referred to in this Part as “the scheme”) by which the operative dates for VAT accounting purposes shall be-

(a) for output tax, the day on which payment or other consideration is received or the date of any cheque, if later; and

(b) for input tax, the date on which payment is made or other consideration is given, or the date of any cheque, if later.