What is the VAT cash accounting scheme?
In simple terms Cash Accounting for VAT permits eligible businesses to pay VAT only after a buyer has paid for the services or goods which they have supplied, compared to standard Value added tax accounting where companies have to pay Value added tax in the period that a sale was made, irrespective of when payment was received for the sale. With the current economic conditions standard Value added tax accounting could see businesses paying Value-added tax on sales which they might be waiting around some time to receive money for.
In the present commercially difficult times, it is a widely acknowledged fact that there is significantly less money to go round. Businesses are improving their credit control and chasing debts harder than they will usually do. On the other hand, customers are stalling payment as long as is possible and attempting to extend credit periods for as long as they can.
With business owners finding the era of quick payment gone, cash problems are all around, particularly for the always hard pressed small companies. In these testing circumstances everything that the Tax rules offer to assist is usually a positive that cannot be overlooked. The Cash Accounting Scheme is for that reason a very helpful life line for currently troubled small business community.
VAT cash accounting scheme eligibility
Not all small business is eligible for VAT cash accounting scheme obviously. In order to be eligible for the VAT cash accounting scheme a business’ expected sales for the upcoming 12 months have to be below £1.35 million. This makes the VAT cash accounting scheme a great resource for smaller businesses that might use a helping hand while they battle with cash flow difficulties generally worsened by poor debtors.
A trade is not allowed to use VAT cash accounting in the following circumstances:
1. They are using the flat rate scheme.
2. They are not up to date with their VAT Returns or VAT payments.
3. They have committed any kind of VAT offence in the past twelve months such as VAT evasion.
Further benefits of the VAT cash accounting scheme
In addition to the obvious financial benefits connected with utilizing the VAT cash accounting scheme, there can be some other positive aspects for business owners which includes straightforward record keeping. In the event that a manual bookkeeping system is in use Value-added tax can easily be accounted for through a straightforward cashbook, without the requirement to maintain a separate sales and purchase day book. Within a spread sheet it could be recorded next to the expense payments.
Disadvantages of the VAT cash accounting scheme
The VAT cash accounting scheme is clearly most beneficial to the firms that have to wait around the most to get money off their buyers. On the other hand the firms that receive immediate receipt for goods or services could find themselves much worse off in the Value added tax cash accounting scheme. This is due to the fact that they will not be able to reclaim Value added tax before they have paid for their invoices. In the same manner the scheme will not help small businesses with product sales which are all or mainly zero rated.
Leaving VAT cash accounting scheme
If any business decides to implement the Cash Accounting Scheme for VAT, it’s not required to inform HM Revenue & Customs either when it starts using the VAT cash accounting scheme or when it chooses to abandon the scheme. There are no forms to fill in and so long as an organization is eligible, the VAT cash accounting scheme is free to get into. In cases where a business enterprise is already registered for Value added tax it can join the scheme at the commencement of any Value-added tax period. If a business is not already registered for VAT then it can join Cash Accounting Scheme on the effective date of registration.
Even though small businesses will need to have sales below £1.35M to meet the criteria to make use of the VAT cash accounting scheme, they will never be compelled to leave it before their taxable sales go beyond £1.6 million.
Help with VAT Cash Accounting
For anyone who needs help with VAT cash accounting or any other VAT issues, Alexander Ene can help. We have been helping businesses of varying sizes sort out their VAT issues for over two decades. Besides VAT, we can also help in other areas of accounting and tax matters. We provide services for sole trader as well as Limited companies. For more information about our accounting services in London, Contact Us!