Petty cash is a small fund of notes and coins kept on the premises for minor business expenses. Under the imprest system the fund starts at a fixed float, every payment is supported by a voucher and receipt, and the float is topped up by exactly the amount spent, so cash plus vouchers always equals the float. That single rule is what makes petty cash easy to check and hard to misuse.

What is petty cash for?

VAT Notice 700/21 describes petty cash as traditionally a small amount of cash on hand that covers day to day expenses of a business, such as buying a pint of milk. Typical uses are postage, small stationery purchases, parking, cleaning materials, staff refreshments and reimbursing an employee for a small business purchase made with their own money. Running these through a separate petty cash book keeps dozens of tiny items out of the main cash book.

ACCA’s FA1 syllabus for 2025 to 2026 expects students to enter and analyse petty cash transactions including any sales tax, to demonstrate the imprest and non imprest systems, to reconcile the petty cash record with cash in hand and to account for petty cash reimbursements. Those four tasks are the whole of running petty cash.

How does the imprest system work?

  1. Set the float. Decide an amount that covers normal spending for a week or a month, and draw that amount from the bank. This is the imprest.
  2. Pay against vouchers. Each payment out is recorded on a numbered petty cash voucher showing the date, amount, purpose and who received the money, signed by the recipient and approved by an authorised person, with the till receipt or invoice attached.
  3. Record in the petty cash book. Each voucher is entered in an analysed petty cash book, with columns for VAT and the main expense types.
  4. Reconcile and top up. At the end of the period the cash left is counted. Cash plus the total of vouchers should equal the float. The custodian then draws from the bank exactly the total of the vouchers, restoring the float.

Under a non imprest system the fund is simply topped up with round sums when it runs low. It is easier to operate but there is no fixed figure to check against, so a shortfall is much harder to spot.

What does a worked imprest cycle look like?

Illustration only. An office keeps a float of £200. During March it pays out:

Voucher Item Total £ VAT £ Postage £ Office £ Travel £
101 Postage stamps 18.00 18.00
102 Printer paper 24.00 4.00 20.00
103 Car park, client visit 12.00 2.00 10.00
104 Milk and tea 9.40 9.40
Total 63.40 6.00 18.00 29.40 10.00

At the month end the count should show £136.60 in the tin, because £200 less £63.40 is £136.60. The top up is a payment of £63.40 from the bank. The double entry posts the analysis totals as debits (VAT £6.00, postage £18.00, office costs £29.40, travel £10.00) and credits the bank £63.40. The petty cash account in the ledger stays at £200 throughout, which is the feature that makes the imprest system work. The VAT treatment of each line here is for illustration; whether VAT is actually reclaimable depends on the supplier and the evidence held, covered below.

If the count shows £131.60 instead, there is a £5 shortfall. It should be investigated, not quietly topped up. If it cannot be explained, it is recorded as a cash difference, approved by someone other than the custodian, and noted.

Can VAT be reclaimed on petty cash purchases?

Yes, if the normal evidence rules are met. VAT Notice 700 says VAT invoices provide the evidence for claiming input tax. For small purchases a simplified invoice is enough: VAT Notice 700 allows a supplier to issue one where the supply is £250 or less, showing the supplier’s name, address and VAT number, the tax point, a description, and the total including VAT and the rate for each VAT rate. A till receipt from a VAT registered shop is often in this form.

VAT Notice 700 paragraph 19.5.9 also says no VAT invoice is needed for some supplies where the total for each supply is £25 or less including VAT, provided you are sure the supplier is VAT registered. The supplies listed are phone calls, purchases from coin operated machines, car park charges (on street parking meters are not subject to VAT) and single or return toll charges paid at the tollbooth. Items such as stamps, which carry no VAT, and purchases from businesses that are not VAT registered have no VAT to reclaim.

Making Tax Digital for VAT has a specific relaxation for petty cash. VAT Notice 700/21 paragraph 7.6, which has the force of law, allows petty cash purchases with a VAT inclusive value below £50 each to be recorded in the digital records as one total, showing the total value and total input tax, as long as each such entry does not exceed £500 including VAT. The vouchers and receipts must still be kept. See Making Tax Digital for VAT.

What controls stop petty cash being misused?

  • One custodian. One named person holds the key and is responsible for the fund. A second person covers absences, with a count on handover.
  • Secure storage. A locked cash box kept in a locked drawer or safe, never mixed with takings.
  • A payment limit. Anything over the limit is paid by bank transfer or card through the normal purchase process.
  • Pre numbered vouchers. A gap in the sequence is a question to answer. Every voucher is signed by the person receiving cash and approved by someone else, with the receipt attached.
  • Top up only against vouchers. The person who approves the top up checks the vouchers, not just the figure, and cancels each one so it cannot be reused.
  • Surprise counts. An occasional count by someone other than the custodian, agreeing cash plus vouchers to the float.
  • No IOUs and no cashing personal cheques. Both turn the float into an informal loan facility and make counts meaningless.
  • Keep the float small. If it is regularly topped up more than once a period, look at what is being bought before increasing it.

What records does HMRC expect?

GOV.UK’s guidance for limited companies lists petty cash books among the records of money spent that must be kept to prepare the annual accounts and Company Tax Return, and says company records must be kept for six years from the end of the last company financial year they relate to, or longer in some cases. VAT Notice 700/21 says business records must generally be kept for VAT purposes for at least six years. Section 386 of the Companies Act 2006 requires day to day entries of all money received and spent, which includes money spent from petty cash. For sole traders, see record keeping for the self employed.

When an employee is reimbursed from petty cash for a business cost, whether the reimbursement is taxable on the employee depends on the employee expenses rules, explained in the paid and reimbursed expenses exemption.

What goes wrong most often?

  • Top ups of round sums. Drawing £100 whenever the tin looks low destroys the imprest check.
  • Personal items through petty cash. Owners’ personal spending belongs in drawings or the director’s loan account, not in office costs.
  • Reclaiming VAT without evidence. A voucher with no receipt supports the expense claim weakly and the VAT claim not at all, unless the £25 exception applies.
  • Petty cash used for wages or casual labour. Payments to staff for their work belong in payroll, where they are recorded and taxed properly, not in a petty cash voucher.
  • Not counting at the year end. The petty cash balance in the accounts should be the counted figure, signed and dated, alongside the bank reconciliation.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.