For small businesses, managing cash flow is a top priority. One crucial decision is whether to use standard VAT (Value Added Tax) accounting or opt for cash accounting VAT, which allows businesses to delay VAT payments until they actually receive payment from customers. But which option is best for your business? How do they work, and what are the pros and cons? Let’s break it down.
In this article, we explore the differences between cash accounting VAT and standard VAT. However, if you need expert advice, it’s worth seeking the support of an accounting firm.
Who Can Choose Cash Accounting VAT?
Not all businesses can opt for cash accounting VAT. It is available only to those that meet specific criteria:
✔ Annual revenue does not exceed HUF 125 million.
✔ Qualifies as a small business under the local SME Act at the beginning of the tax year.
✔ Registered for business purposes in Hungary, or if not established, has a residence or habitual presence in Hungary.
✔ Not under bankruptcy or liquidation proceedings.
✔ Not part of a VAT group and does not benefit from VAT exemption.
Now, let’s compare how standard VAT and cash accounting VAT work in real-life situations.
How Does Standard VAT Work?
Under the standard VAT system, businesses must pay VAT to the tax authority based on the invoice issue date or performance date, regardless of when the customer actually pays. Depending on the business’s tax filing obligations, VAT payments may be due monthly, quarterly, or annually.
Example: Standard VAT in Action
📌 BútorTrend Ltd., a furniture manufacturer, receives a large order from a hotel chain.
📌 In February, they issue an invoice for HUF 2,540,000 (HUF 2,000,000 net + HUF 540,000 VAT).
📌 The hotel chain states they will only pay in April.
🔹 What happens next?
Since BútorTrend Ltd. is under the standard VAT scheme, it must report the VAT in its February tax return and pay HUF 540,000 by March 20, even though the customer will not pay until April.
✅ Advantage: No need to track when invoices are paid.
❌ Disadvantage: The company must prepay VAT, which could create liquidity issues if payments are delayed.
How Does Cash Accounting VAT Work?
With cash accounting VAT, businesses only need to pay VAT after receiving payment from customers. This approach improves liquidity management, especially for small businesses that face late payments.
Example: Cash Accounting VAT in Action
📌 ITConsult Ltd., an IT consulting company, issues an invoice in February for HUF 635,000 (HUF 500,000 net + HUF 135,000 VAT).
📌 The client only pays in May.
🔹 What happens next?
Since ITConsult Ltd. uses cash accounting VAT, they only need to report and pay VAT in their June tax return – meaning they won’t have to prepay VAT before receiving the money.
✅ Advantage: VAT is only due when cash is received, preventing cash flow issues.
❌ Disadvantage: Customers cannot reclaim VAT until they actually pay, which might make cash accounting invoices less attractive to some clients.
Key Differences: Standard VAT vs. Cash Accounting VAT
| Standard VAT | Cash Accounting VAT | |
| When is VAT due? | When the invoice is issued/performance date, even if payment is delayed. | Only after receiving payment. |
| When can VAT be reclaimed? | Immediately after receiving a supplier invoice, regardless of payment. | Only when the invoice is actually paid. |
| Advantage | No need to track invoice payments. | Better cash flow management, no prepayment burden. |
| Disadvantage | Can cause liquidity problems if customers pay late. | Customers may prefer to avoid these invoices due to delayed VAT reclaim. |
When Should You Consider Cash Accounting VAT?
✅ If your business frequently experiences late payments.
✅ If cash flow management is critical for your operations.
✅ If you offer services rather than sell products, and you don’t have high supplier costs.
Cash accounting VAT can be a game-changer for small businesses, reducing financial pressure and improving liquidity. However, it’s essential to weigh the pros and cons—especially if your customers might be hesitant due to delayed VAT deduction on their end.
Still unsure which VAT system is best for your business? Consulting with a tax expert can help you make the right decision!
Disclaimer
This article is for informational purposes only and should not be used as the sole basis for making VAT-related decisions. Every business is unique, and various factors must be considered when selecting the appropriate VAT scheme. Therefore, we cannot assume any liability for decisions made solely based on this content.
We strongly recommend seeking professional advice to ensure compliance and optimal tax planning. Our clients receive expert guidance tailored to their specific needs.
