VAT – Cash Accounting

At AHACCOUNTANTS, we can help businesses in the Nottingham area understand the Cash Accounting Scheme for VAT. This scheme allows businesses to account for and pay VAT based on cash received and paid, rather than on the basis of invoices issued and received.

Advantages and Disadvantages of the Scheme

Advantages:

1. Cash Flow Management: Output tax on sales income is not due until the business receives payment for its sales invoices. This is beneficial for cash flow, especially if customers pay promptly.
2. Automatic Bad Debt Relief: If no payment is received, no output tax is due, providing relief on unpaid debts.
3. Simplicity: Smaller businesses often find it easier to manage cash flows than to track invoiced amounts.

Disadvantages:

1. Delayed Input Tax Recovery: Businesses cannot recover input tax until they have made payments for suppliers’ invoices.
2. Unsuitability for Startups: Businesses with substantial initial expenditure (e.g., equipment and stock) may find it better to use the accruals basis to recover initial input tax, as their input tax might exceed output tax.

Key Rules

• Eligibility: Businesses can join the scheme if they reasonably believe their taxable turnover will not exceed £1,350,000 in the next 12 months. They must also:

• • Be up to date with VAT returns.
  • Have paid or agreed to settle all VAT due.
  • Not have been convicted of VAT offences in the previous year.

• Threshold Calculation: All standard and zero-rated supplies count towards the £1,350,000 threshold, while exempt supplies are excluded.
• Avoid Duplicate Accounting: When joining the scheme, businesses must avoid accounting for VAT on amounts already dealt with under the invoice basis.
• No Prior Notification: Businesses can start using the scheme without notifying HMRC.
• Exclusions: The scheme does not cover:

• • Goods bought or sold under lease or hire-purchase agreements.
  • Goods bought or sold under credit sale or conditional sale agreements.
  • Supplies invoiced where full payment is not due within six months.
  • Supplies invoiced in advance of delivering goods or performing services.

• Exit Requirement: If annual taxable turnover exceeds £1,600,000, the business must leave the scheme immediately. Upon leaving, VAT becomes due on supplies not yet accounted for, but unclaimed input tax can be offset against output tax. HMRC allows a six-month transitional period for accounting for outstanding VAT on a cash basis.

Accounting for VAT

Output tax must be accounted for when payment is received, with specific rules for different payment types:

• Cheque: Treated as received on the date the cheque is received or the date on the cheque (whichever is later). Adjustments can be made if the cheque is not honoured.
• Credit/Debit Card: Treated as received/paid on the date of the sales voucher.
• Standing Order/Direct Debit: Treated as received/paid on the day the bank account is credited.
• Part Payments: VAT must be accounted for on all receipts/payments, including part payments, which should be allocated to invoices in date order.

Record Keeping

Under the Cash Accounting Scheme, businesses must maintain a cash book summarising all payments made and received, with a separate column for VAT. Payments should be cross-referenced to the appropriate purchase/sales invoices. Additionally, normal requirements regarding copies of VAT invoices and evidence of input tax apply.