Petty cash is a small amount of cash a business keeps on the premises to pay for minor expenses, such as postage, parking, milk or a taxi, where raising an invoice or using a card is impractical. It is still company money. Every payment needs a voucher and a receipt, the float should be reconciled regularly, and the spending has to reach the accounting records. For VAT-registered businesses, HMRC lets petty cash purchases under £50 each be recorded as a total in digital records, up to £500 per entry.
How a petty cash system works
Most businesses run petty cash on the imprest system. The business decides on a fixed float, say £200. As money is spent, each payment is supported by a petty cash voucher with the receipt attached. At the end of the period, the vouchers are totalled and the float is topped up by exactly that amount, bringing it back to £200.
The control is built in. At any moment, the cash in the tin plus the vouchers for money spent should equal the float. If they do not, something is missing, and you find out quickly while the amounts are small.
An illustration. A £200 float is used during the month for postage of £38.40, parking of £12.00, office supplies of £61.20 and a taxi of £32.00. The vouchers total £143.60 and £56.40 is left in the tin. The custodian draws a cheque or makes a transfer of £143.60 to restore the float to £200.
Recording petty cash in the books
Petty cash is treated as its own bank account in the ledger. Two entries do the work:
- Setting up or topping up the float. Debit petty cash, credit the bank account;
- Recording the spending. Debit each expense account (and input VAT where it can be reclaimed), credit petty cash.
Many businesses keep an analysed petty cash book with a column for each type of expense and one for VAT. The column totals are posted to the nominal ledger at the end of each period. In cloud accounting software, the petty cash account is set up like a bank account, and expenses are posted against it from the vouchers. At any month end, the balance on the petty cash account should equal the cash physically counted.
This is not optional bookkeeping. Section 386 of the Companies Act 2006 requires every company to keep adequate accounting records, including day-to-day entries of all money received and spent. HMRC can charge a company a penalty of up to £3,000 for failing to keep and preserve records. Untracked cash is one of the quickest ways to fail that test.
VAT on petty cash purchases
Input VAT on petty cash spending can be reclaimed in the normal way, but only with the right evidence:
- Keep the VAT receipt. For supplies of £250 or less including VAT, a supplier can issue a simplified VAT invoice showing its name, address and VAT number, the time of supply, a description, and the total including VAT and the VAT rate;
- Know the £25 exceptions. VAT Notice 700 says you do not need a VAT invoice where your total spend on each supply is £25 or less including VAT for phone calls from public or private phones, purchases through coin-operated machines, car-park charges and a single or return toll paid at the booth. On-street parking meters are not subject to VAT, so there is nothing to reclaim;
- Do not reclaim where no VAT was charged. Purchases from traders who are not VAT-registered, and items that are zero-rated or exempt, carry no VAT to reclaim. The receipt will show whether VAT was charged.
Making Tax Digital adds one helpful simplification. HMRC's VAT Notice 700/22 says petty cash purchases with a VAT-inclusive value below £50 do not need to be recorded individually in the digital records. The business can record the total value and total input tax instead, provided each such entry does not exceed £500 VAT-inclusive. The individual receipts still need to be kept.
Controls that actually work
- One custodian. A single named person holds the key and is accountable for the float;
- A sensible float. Large enough for a month of genuine small spending, small enough that a loss is not material;
- A spending limit. Set a maximum per payment; anything larger goes through purchase invoices or expense claims;
- Authorised vouchers. Each voucher shows the date, amount, purpose, the person paid and an authorising signature, with the receipt attached;
- Surprise counts. Someone other than the custodian counts the cash and checks it against the vouchers from time to time;
- Regular top-ups. Replenish on a fixed cycle, reviewed by someone senior, so that missing receipts are chased while memories are fresh;
- No IOUs or personal loans. These turn into unrecorded loans to staff and directors.
Petty cash is a classic area for small-scale fraud precisely because each amount looks trivial. The same reconciliation discipline used for the bank, covered in our guide to bank reconciliation, applies to the cash tin.
How long to keep the records
HMRC expects a limited company to keep its records for 6 years from the end of the last financial year they relate to, and VAT records for at least 6 years. Sole traders must keep records for at least 5 years after the 31 January submission deadline for the tax year. Petty cash vouchers and receipts are part of those records, so scan them or keep them filed by period.
Do you still need petty cash?
Many businesses have replaced the cash tin with company debit or prepaid cards issued to named staff, linked to expense software that captures receipts on a phone. These give the same convenience with a better audit trail, and they remove the risk of holding cash. Where petty cash remains, it is usually for a handful of small purchases, and that is when the controls above matter most.
If your petty cash, expenses and small receipts are taking more time than they should, our bookkeeping services team can set up the process and keep the records reconciled each month. Our Xero bookkeepers can configure petty cash and receipt capture in the software.