A change in VAT regulations will give a significant boost to the finances of about 9,000 small and medium-sized firms. The move will cost the Exchequer £87 million this year. The Minister for Finance, Mr McCreevy, has announced that all companies paying less than £500,000 in VAT annually will, in future, only make returns when they receive payment for goods, not when they invoice customers.

Until now, only firms with a VAT eligibility of less than £250,000 paid on a cash basis, with all larger firms paying on the basis of invoices issued. The change in the regulations takes effect from the July/August accounting period.

Mr McCreevy said the measure would "significantly benefit a wide variety of small businesses and help them finance expansion and increase the numbers employed".

He said the increase in the threshold was "facilitated by the strong tax revenue buoyancy in the first half of the year". Tax receipts are running up to £500 million above Budget this year, meaning the £87 million once-off cost this year can be easily absorbed.

It will have no further cost in future years.

The Department of Finance said the main types of business to benefit would be: suppliers of goods to the retail trade; a wide range of small manufacturing firms; building contractors and sub-contractors; electrical, plumbing and carpentry firms.

The increase in the threshold had been promised by the Taoiseach, Mr Ahern, to the small business sector at meetings last year.

Up to 1993, companies had the option of accounting for VAT on the basis of cash actually received rather than invoiced sales. According to the 1994 Task Force Report on Small Business: "The removal of this facility made a bad cash-flow situation worse for many enterprises" and also meant companies would in some cases pay VAT on payments they never received, because of bad debts. Following this report the £250,000 threshold was introduced.

The move was welcomed by the Small Firms' Association (SFA) and the Dublin Chamber of Commerce.

Mr Pat Delaney, SFA assistant-director, said: "This will be of enormous benefit and companies will seriously notice the improvements to their cash-flow."

He said another benefit would be that firms would no longer have to "resort to factoring and invoice discounting".

Mr Declan Martin, economic director of the Dublin Chamber of Commerce, said it was the "first indication of this new Government's commitment to helping business grow and will ease some of the daily pressures of business".

While welcoming the announcement, ISME said it did not address "the overall issue for credit-based industries" where banks were not permitted to accept "book debts".

The association also said the Minister should increase the threshold further during the lifetime of the Government. "A half a million pounds is the point when companies are really beginning to grow; it's a pity the Minister decided to set the cut-off just there," said spokesman, Mr Don Curry.

A Department of Finance spokesman said the measure was an implementation of the 1994 Task Force on Small Business.

The SFA spokesman said many small firms would use the cash-boost to pay off other debts.