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VAT Schemes: Are You Standard Invoice or Cash Accounting?

Do you know why your VAT scheme setup matters for cashflow?

When setting up VAT in bookkeeping software like Xero, the default is often the “standard accounting scheme.” But what does that actually mean, and could it be affecting your cashflow more than you realise?

What is the Standard VAT Accounting Scheme?

Under the standard scheme, your VAT liability is based on the invoice date, not the payment date.

  • Sales invoices: You’ll owe HMRC the VAT for any invoices dated within the VAT quarter, whether your customers have paid you or not.
  • Purchase invoices: You can reclaim input VAT on any supplier invoices dated in the quarter, even if you haven’t yet paid them – but they have to be logged on your bookkeeping system to appear on the return.

This setup can be fine for some businesses — but for others, it creates cashflow strain. You may find yourself paying VAT on money you haven’t actually received.

Options You Should Know About

If the standard scheme doesn’t work for you, there are alternatives and reliefs:

  • Bad Debt Relief: If sales invoices remain unpaid for more than 6 months, you can reclaim the VAT. (The same rule applies to your suppliers and input VAT, if you’ve claimed the relief but not paid your suppliers for more than 6 months.)
  • Cash Accounting Scheme: If your taxable turnover is under £1.35m, you can apply to use the cash scheme. Here, you only pay VAT when customers pay you, and you only reclaim VAT once you’ve paid suppliers.
  • Continuous Supplies: Businesses such as builders who are working on long projects can raise a “Request for Payment”. This is instead of a VAT invoice, until the exact payment is known. A VAT invoice is then issued once funds are received. There are specific rules around this, but reach out to us to explain these in plain English.

It’s also worth checking how you handle purchases. If you only enter supplier invoices when you pay them, you could be missing out on reclaiming input VAT sooner. It really does pay to take a best practice approach when it comes to your bookkeeping.

Why It Matters for Cashflow

Choosing the right VAT scheme can make a big difference to how much cash sits in your bank account at any given time. That said, whatever scheme you use, it’s good practice to set aside VAT into a separate savings account — so you’re never caught short when the bill falls due.

Real-World Examples

  • Estate Agent: Raises an invoice on the day of completion and receives payment straight away. The standard scheme works well, as VAT is paid when cash has already been received, and they benefit from reclaiming input VAT earlier.
  • Creative Agency: Issues invoices with 30–60 day terms and has limited costs. Cash accounting may be better, as it avoids paying VAT to HMRC before clients have paid.

How Brisan can Support You

We can review your existing set up and recommend the most efficient way forward for you, explaining the pro’s and con’s of each and using your data for real-life scenario planning and comparative examples.

We recommend speaking to us before simply switching the settings in your system, because your system won’t take into consideration where VAT hasn’t been paid or has been paid already, which could be worse for your cashflow.

Contact us to book in a call to discuss your VAT set up today.