Under the standard value added tax (VAT) scheme, as a usual process, the business repays the VAT charged on all the invoices to HMRC every quarter. However, due to delayed payments from clients or if a client defaults, the business cash flow management can suffer. This situation can only be made worse if the business has to repay the VAT amount of each invoice to HMRC in advance. For many businesses, VAT Cash Accounting Scheme can solve any cash flow concerns, as the business only account for VAT once the payment for an invoices have been made. Prominently, it should be noted that the business can use the Cash Accounting Scheme alongside the Flat Rate VAT scheme.
Advantages and Disadvantages of VAT cash accounting scheme
The advantages of the VAT cash accounting scheme are as follows:
- Output tax is not due until the business receives payment against the sales invoices. However, if customers pay regularly, the advantage will be limited
- There is an automatic bad debt relief as , if no payment is received, no output tax is due
- Most businesses find it easier to deal with cash flows in and out of their business than invoiced amounts
- There is no input tax recovery until payment of suppliers’ invoices
- This scheme will not be beneficial for net repayment businesses. For example, in case of a new business there is substantial initial expenditure on equipment, stocks etc. and where the input VAT exceeds the output VAT, should delay starting to use this scheme. In this way, the business recovers the initial input tax on the basis of input invoices as opposed to payments
Key points under this scheme
Any business can join this scheme and is applicable for businesses that believe its taxable turnover in the next 12 months will not exceed £1,650,000 provided that it:
- is upto date with VAT returns
- has paid all the VAT dues or agreed to settle any outstanding amount in instalments
- has not, in the prior year, been convicted of any VAT offences
- supplies invoiced where full payment is not due within six months
- goods bought or sold under lease or hire-purchase agreements
- supplies invoiced in advance of delivering the goods or performing the services
- goods bought or sold under credit sale or conditional sale agreements
All standard and zero-rated supplies are included in the £1,350,000 except predictable sales of capital assets that were formerly used within the business; exempt supplies are excluded from this. When a business joins this scheme, it must be careful not to account for VAT again (VAT already charged previously on the basis of invoice given to the customer and received). A business can start using the scheme without informing HMRC. It does not cover:
Once annual turnover exceeds or equals £1,600,000 the business must exit this scheme immediately. When the business leaves the scheme, VAT is payable on all supplies on which VAT has not already been accounted for. However, outstanding VAT can be accounted for on a cash basis for a further six months after leaving the scheme.
Cash book / Bank Statements will be a prime record under the cash accounting scheme. The cash book will summarise all payments made and received with a separate column for VAT. The payments need to be reckoned clearly to the appropriate purchase or sales invoice. In addition, the normal requirements regarding copies of VAT invoices and evidence of input tax apply.
How can DNS Accountants help with VAT Cash Accounting Scheme
Every business has different needs and a varied approach towards taxation. Some prefer the use the VAT flat rate scheme while other might find VAT cash accounting scheme beneficial. In case businesses have any concerns regarding which scheme is beneficial for them, without hesitation, they can contact DNS Accountants. Our team includes well-read taxation professionals and Chartered Accountants and we are one of the leaders in accounting and taxation in the UK. Our team members have years’ of experience in dealing with VAT related queries and helping clients adopt the best scheme for their business. If a business has missed filing their VAT returns or is unclear about how to file a VAT return, please get in touch with us at www.dnsassociates.co.uk. We focus on delivering exceptional customer service, and believe in offering unmatched client service. DNS Accountants offers services at a nominal rate and helps clients with VAT returns, tax planning, and other accounting services.
Our firms' technology-driven, professional taxation and accounting services take the burden of running a business away from the business owners. On a daily basis, our team helps clients with: bookkeeping, business tax, VAT, and year end accounts for businesses from various industrial sectors. DNS offers company formation, Construction Industry Scheme (CIS), pension auto enrolment, payroll and IPSE membership. Our additional services include supporting clients with business bank account based, company formation services including bank account opening, preparing business plans along with others