Torr Waterfield explain what the VAT cash accounting scheme is, the advantages and disadvantages of using cash accounting and information on how to join the scheme.
What is the VAT cash accounting scheme?
The VAT cash accounting scheme is a useful tool for many small businesses, as you only pay the VAT on your sales to HMRC once you have received payment yourself.
However, you may only reclaim VAT on your purchases from HMRC when payment of the invoice has been made.
You can join the cash accounting scheme if your turnover is less than £1.35m, and can continue to use the scheme until your turnover reaches more than £1.6m.
Your business should be eligible to use the scheme if you meet the threshold requirement, unless your VAT affairs are not up-to-date, you have been convicted of a VAT offence or have been penalised for evading VAT over the past 12 months.
What is the advantage of using cash accounting?
Clearly the main benefit of joining this VAT scheme is in the cash flow benefits it provides. If you have a late paying client for example, you will not have to account for the VAT on any outstanding sales invoices until you have been paid. In fact, if you incur any bad debts, the VAT will never need to be paid to HMRC.
What is the disadvantage of using cash accounting?
There may be some disadvantages, depending on your situation. For example, as you cannot reclaim the VAT on any purchases you make until payment is made, this could cause cashflow problems if you buy a substantial amount of stock on credit.
Joining the cash accounting scheme
You do not need to inform HMRC if you want to join the scheme. However, you must start at the beginning of a new VAT quarter.
You can also leave the scheme at the end
of any VAT quarter, if necessary, or if your taxable turnover reaches the £1.6m mark.
If you would like any assistance on joining, leaving or any further information on the cash accounting scheme, then feel free to contact the office on 0116 242 3400.