VAT Cash Basis Threshold

You can join the VAT Cash Accounting Scheme if your estimated VAT taxable turnover for the next 12 months is £1.35 million or less, and you must leave the scheme once your VAT taxable turnover exceeds £1.6 million. Those are VAT figures and they belong to a VAT scheme. The income tax cash basis is a completely different regime, and it has no turnover threshold at all.

That second sentence is the reason this page exists. Two regimes share the word "cash", and people routinely apply one's numbers to the other's question.

Two Schemes, One Word: Which One Are You Asking About?

Before any figure is useful, work out which question you are holding.

If you are asking when your business has to hand VAT over to HMRC, you are asking about the VAT Cash Accounting Scheme. It is a VAT accounting method set out in the VAT Regulations 1995 (SI 1995/2518) Part VIII. It has live turnover thresholds, £1.35 million to join and £1.6 million to leave, and it is open to any VAT registered business, limited companies included.

If you are asking how your taxable profit is calculated for your Self Assessment return, you are asking about the income tax cash basis in ITTOIA 2005. That regime has no turnover threshold of any kind. The old £150,000 entry and £300,000 exit figures were not raised, they were repealed outright from 6 April 2024 by Finance Act 2024 Schedule 10, which omitted ITTOIA 2005 s.25A and ss.31A to 31D. It is also closed to limited companies. Our page on the income tax cash basis is the full treatment of that regime.

You can be on one, both, or neither. A sole trader garage owner can be on the income tax cash basis by default and on invoice accounting for VAT. A limited company salon can be on the VAT Cash Accounting Scheme and can never be on the income tax cash basis. Neither fact tells you anything about the other.

The VAT Cash Accounting Scheme Thresholds

Two numbers, doing two different jobs.

Entry: £1.35 million or less. You may start using the scheme if your estimated VAT taxable turnover for the next 12 months is £1.35 million or less. Note the tense. The entry test is forward looking and is an estimate made in good faith, not a historic figure pulled off last year's accounts. A business that turned over £1.5 million last year but has just lost its largest contract can reasonably estimate that the next 12 months will come in under £1.35 million.

Exit: more than £1.6 million. You must leave the scheme once your VAT taxable turnover exceeds £1.6 million. This one is not an estimate and not optional.

Both figures come from HMRC's Cash Accounting Scheme eligibility guidance.

The £250,000 gap between the two is deliberate. If entry and exit sat on the same number, a business oscillating around it would be dragged in and out of the scheme repeatedly, and every crossing carries an administrative cost. The gap gives a growing business room to keep the scheme through a good year without bouncing.

There is no application, no approval letter and no reference number. You start using the scheme at the beginning of a VAT accounting period and you keep records that show you did. Leaving voluntarily works the same way, at the end of an accounting period.

What "VAT Taxable Turnover" Means for This Test

Both thresholds are measured on VAT taxable turnover, which is not the same as turnover in your accounts and not the same as the total on your bank statement.

VAT taxable turnover is the value, excluding VAT, of everything you sell that is not exempt and not outside the scope of UK VAT. That means:

• Standard rated sales at 20% count, at their VAT exclusive value.
• Reduced rated sales at 5% count.
• Zero rated sales count in full. This catches people out. Zero rated is a rate of VAT, not an absence of VAT, so a zero rated bakery or children's clothing line adds to the figure even though it produces no output tax.
• Exempt supplies do not count. Insurance, most finance, most health and welfare, and much land and property income sit outside the figure.
• The VAT itself never counts. A £1.2 million VAT inclusive year is £1 million of VAT taxable turnover.

The practical consequence is that a business can be much closer to the exit figure than its top line suggests, or much further away. A letting business with substantial exempt rental income and a small taxable management fee has a VAT taxable turnover that is a fraction of its accounts turnover. A zero rated food wholesaler has one that is almost all of it.

The same definition drives the £90,000 VAT registration threshold, which is worth saying plainly: that page answers whether you must register for VAT at all; this page answers which accounting method an already registered business may use. Same measure, entirely different questions, and four digits apart.

The Boundary: VAT Cash Accounting Against the Income Tax Cash Basis

This table is the point of the page. Read it once and the two regimes stop blurring.

VAT Cash Accounting Scheme	Income tax cash basis
A limited company running a garage can use it, on the same terms as a sole trader	The same company cannot use it at all; a company computes its profits under GAAP, per CTA 2009 s.46(1)
Turnover test: join at £1.35 million or less, leave above £1.6 million	No turnover test of any kind since 6 April 2024
You opt in by starting to use it, and you must leave when you breach the exit figure	It is the default; you leave only by electing for traditional accounting under ITTOIA 2005 s.25C
A salon's VAT return: output tax falls due when the client pays the bill	A sole trader salon owner's tax return: profit counted when the money arrives
Bad debt relief is automatic, because an unpaid invoice never enters the VAT return	An unpaid invoice is never income, so a builder's £40,000 bad debt is never taxed
Changes when you account for VAT, nothing else. Rates and liabilities are untouched	Changes how taxable profit is computed, including capital spending and year end stock
Statutory home: VAT Regulations 1995 (SI 1995/2518), Part VIII	Statutory home: ITTOIA 2005 ss.24A, 25B, 25C, 33A

The row that causes the most damage in practice is the second one. A sole trader who reads "£1.35 million" on a VAT page and concludes that their £1.4 million trade is too big for the income tax cash basis has drawn a conclusion from the wrong regime. There is no size at which a sole trade becomes too big for the income tax cash basis.

What the Scheme Does to a VAT Return

The mechanic is simple and it only touches dates.

Output tax is accounted for in the VAT period in which you receive payment from your customer, rather than the period of the tax point on the invoice. Issue an invoice in March and get paid in May, and the VAT lands in the period containing May.

Input tax is recovered in the period in which you pay your supplier, rather than the period of their invoice. That is the side people forget. The scheme is not free: you give up the ability to reclaim VAT on a purchase invoice you have not yet settled. A business that takes long credit from its suppliers and gives short credit to its customers can be worse off inside the scheme than outside it.

What the scheme does not change is worth listing, because assumptions creep in:

• VAT rates and liabilities are untouched. A standard rated supply is still standard rated. A zero rated supply is still zero rated.
• Invoices are still invoices. You still issue proper VAT invoices at the normal time. Your customer still recovers the VAT under their own rules, on their own timing.
• Return frequency and deadlines are unchanged. Quarterly stays quarterly.
• Making Tax Digital still applies. The scheme is an accounting method, not an exemption from digital record keeping or from filing through compatible software.

Automatic bad debt relief, the real reason businesses join

Outside the scheme, VAT on a sale becomes due when you invoice it, whether or not you are ever paid. If the customer defaults, you can claim bad debt relief, but only once the debt is at least six months overdue and has been written off in your VAT account. In the meantime you have funded HMRC's share of money you never received.

Inside the scheme that whole sequence disappears. The trigger for output tax is payment. No payment, no trigger, no VAT, no claim, no six month wait. For a trade with genuine bad debt exposure, a subcontractor invoicing main contractors, a wholesaler supplying independent retailers, a garage invoicing fleet customers, this is the substantive benefit, and it is the one that is not merely timing.

Who Cannot Use It, and When You Must Leave

The turnover test is the first gate, not the only one. Two other things restrict the scheme, and both are specific enough that they should be read from HMRC rather than from a summary.

Your compliance record matters. The scheme is a concession about timing, and HMRC does not extend it to businesses that are behind with their VAT obligations. A business with outstanding VAT returns or outstanding VAT payments is not in a position to join. Some other VAT schemes are also incompatible with it.

Some supplies are carved out. Even inside the scheme, particular kinds of transaction stay on the ordinary invoice date rules rather than the payment date, so a business using the scheme can end up applying both timings on the same return.

We are not going to print either list here, because a partial list read as a complete one is worse than no list. The authoritative lists sit on HMRC's Cash Accounting Scheme eligibility page, and that is where to check your own position before you start using the scheme.

On the way out, there are two routes. You may leave voluntarily at the end of any VAT accounting period, without asking HMRC. You must leave once VAT taxable turnover exceeds £1.6 million, and once you are outside the scheme you go back to accounting for VAT by invoice date.

Leaving the Scheme: the Catch-Up

This is the part a growing business does not see coming, and it is the reason the exit threshold deserves a diary entry rather than a discovery.

While you are in the scheme, every unpaid sales invoice on your ledger is carrying deferred output VAT. That VAT is not forgiven, it is waiting. When you leave the scheme, the deferral ends and the output tax on invoices you have issued but not yet been paid for has to be brought into account.

The size of that catch-up is a direct function of your sales ledger. A business with £300,000 of unpaid standard rated invoices at the moment it leaves is carrying £50,000 of VAT that has been sitting comfortably deferred and now is not. Growing fast makes this worse, because the ledger is at its largest exactly when the turnover test tips you out.

The detailed mechanics of the leaving adjustment, including the timing HMRC allows, are set out on HMRC's Cash Accounting Scheme guidance, and you should work from that page rather than from any general description when you are actually doing it. The principle is the part to plan around: the outstanding output tax becomes due, and it becomes due at the point you are least liquid.

The Income Tax Cash Basis, in Contrast

Briefly, because it has its own page.

The income tax cash basis is how an unincorporated business computes its trading profit: income counted when the money arrives, expenses counted when they are paid. Since 6 April 2024 it is the default under ITTOIA 2005 s.24A, not a scheme you join. You leave it by making a positive election for traditional accounting under s.25C on your Self Assessment return.

It has no entry threshold and no exit threshold. Eligibility turns on who you are, a sole trader or a partnership of individuals, and on whether your trade is an excluded trade under s.25B. Turnover is not part of the test. And it is closed to limited companies, limited liability partnerships and partnerships with a corporate partner, because it is a rule about income tax and a company's profits are computed under CTA 2009 s.46(1).

If that is the regime you came here for, go to the full treatment on our cash basis page. Take nothing from the £1.35 million and £1.6 million figures above with you.

Worked Example One: Growing Through the Exit Threshold

A limited company running three MOT and servicing centres is VAT registered and uses the Cash Accounting Scheme. It joined two years ago, when its estimated VAT taxable turnover for the following 12 months was £1.28 million, comfortably inside the £1.35 million entry figure.

Trade has been good. It wins a fleet servicing contract, and its VAT taxable turnover for the current 12 months reaches £1.65 million.

That is above £1.6 million, so the company must leave the scheme. There is no discretion in that and no relief for a one-off contract. Note also what did not matter: it stayed eligible all the way through £1.4 million and £1.55 million, because the exit figure is £1.6 million rather than the £1.35 million it joined on.

Now the cost of leaving. Fleet customers pay on 60 day terms, so at the point the company comes off the scheme its sales ledger carries £240,000 of issued but unpaid standard rated invoices. Inside the scheme the output tax on those invoices, £40,000 at 20%, was waiting for the customers to pay. Once the company is outside the scheme that deferral ends and the £40,000 has to be brought into account.

Nothing has been lost. That £40,000 was always going to be paid to HMRC; the scheme simply meant it would have been paid as each customer settled up. What has happened is that a timing benefit built up over two years has to be unwound in one go, in the quarter when the business is also funding the working capital of a new contract. The lesson is not to avoid growth. It is that the £1.6 million line is a cash flow event as well as a compliance event, and the quarter to plan it in is the one before you cross it.

Worked Example Two: One Quarter, Two Methods

A VAT registered building contractor has a quarter that looks like this:

• Sales invoices issued in the quarter: £90,000 plus VAT of £18,000.
• Of those, one invoice for £12,000 plus VAT of £2,400 is still unpaid at the quarter end.
• Purchase invoices received in the quarter: £40,000 plus VAT of £8,000. All are paid within the quarter.

On ordinary invoice accounting, output tax is £18,000 because that is what was invoiced, and input tax is £8,000. VAT payable for the quarter is £10,000.

On the Cash Accounting Scheme, output tax is £18,000 less the £2,400 on the unpaid invoice, so £15,600. Input tax is still £8,000, because every purchase invoice was paid. VAT payable is £7,600.

The difference is £2,400, and it is cash flow, not a saving. When the customer pays in the following quarter, that £2,400 falls due then. The contractor's total VAT across the two quarters is identical either way.

The one case where it stops being pure timing is default. If that customer goes under and never pays, the scheme user never accounts for the £2,400 at all. The invoice accounting user paid it in the first quarter and has to wait until the debt is six months overdue and written off before claiming it back. Same £2,400, very different journey.

Now flip one fact. Suppose the contractor had not paid £20,000 of those purchase invoices by the quarter end. On invoice accounting the input tax is still £8,000. On the scheme it drops to £4,000, and VAT payable rises to £11,600, which is worse than staying out. That is the trade the scheme asks you to make, and it is why it suits businesses that are paid slowly and pay quickly rather than the reverse.

What People Get Wrong

"The cash basis threshold is £1.35 million"

Only for VAT. Said about income tax it is simply wrong, and it sends sole traders looking for an exit they will never reach. The income tax thresholds were abolished on 6 April 2024.

"My company is on the cash basis"

A company can be on the VAT Cash Accounting Scheme. It cannot be on the income tax cash basis, ever. When a director says "we're on the cash basis", the follow-up question is always which regime they mean, because one of the two answers is impossible.

"I have to leave at £1.35 million"

No. £1.35 million is the entry figure only. You stay in until you exceed £1.6 million. Leaving early because you crossed the joining figure gives up a cash flow benefit you were entitled to keep.

"Cash accounting means I do not pay VAT on bad debts, so it saves me money"

Half right, and the half that is wrong matters. On debts that are genuinely never paid, the scheme does save you the funding cost and the claim. On everything else it is purely timing, and treating the quarterly reduction as profit is how businesses end up short when the deferred VAT catches up.

"The £90,000 threshold and the £1.35 million threshold are the same test"

They use the same measure, VAT taxable turnover, to answer different questions. £90,000 decides whether you must be registered. £1.35 million decides whether a registered business may use this accounting method. Registration first, then scheme.

"The scheme changes what VAT I charge"

It does not touch rates or liabilities at all. Your invoices look exactly the same and your customer's recovery position is unaffected.

"I can run cash accounting alongside whatever other scheme I like"

Scheme interactions are specific and some combinations are not permitted. Check the position for your combination on gov.uk before you operate two together, rather than assuming from a general article.

Where to Go Next

• Cash basis: the income tax regime in full, why the thresholds were abolished rather than raised, and how to elect out.
• VAT threshold 2026/27: the £90,000 registration threshold, the rolling 12 month test, and the 30 day notification deadline. That is the number that decides whether you register at all.
• Retail VAT schemes: another VAT scheme family with its own limits, £1 million and £130 million, for shops that cannot invoice every sale.
• HMRC: Cash Accounting Scheme eligibility: the authoritative lists of who cannot join and which supplies are excluded.