What is difference between Cash and Accrual

Cash Accounting allows businesses to delay paying their VAT until their invoices are paid rather than when they are raised.  

It can be used by businesses whose taxable supplies will be less than £1.35m in the next year. 

This is useful for businesses providing extended credit or who suffer from bad debts.

Businesses can leave the scheme if:

• taxable supplies exceeds £1.6m (HMRC will withdraw the use)

• convicted of VAT offense
• subject to a penalty for VAT evasion

If a business leaves Cash Accounting it is important to ensure that any Sales Invoices previously raised but not yet paid are accounted for in their next VAT return. 

Also remember to add in any Purchase Invoices that you have not paid as they need to be added to your next VAT return to reclaim too in one of two ways:

• all outstanding transactions in one return (could cause major cash-  flow problems for VAT payable)
• take a further 6 months to account for all the VAT not yet  paid

Businesses do not have to advise HMRC which option they are going to use but you cannot use the second option if the scheme has been withdrawn by HMRC.

Source: IAB 'The Bookkeeper'