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VAT Cash Accounting Scheme Guide

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We seem to be entering a period when banks are likely to have less money to lend, and when they do lend interest rates charged will be "realistic". The self styled liquidity crisis is with us!

Consequently the management of your cash resources will be critical in the coming months as businesses chase liquidity by tightening up on their credit control. This process will of course be frustrated as debtors hang on to cash reserves by extending the credit they take from suppliers.

If your business qualifies, and you are not already using the scheme, the VAT Cash Accounting scheme could be a lifesaver.

What are the rules of the cash accounting scheme?

  • VAT is accounted for on a payments basis i.e. output tax due on date of payment from a customer; input tax can be claimed when a supplier is paid
  • Available to any business with annual taxable sales of £1.35m or less (zero-rated sales are still taxable but exempt sales are not; exclude any sales of capital assets)
  • No application form needed to join the scheme - can be adopted by an eligible business at the beginning of any VAT period
  • Before adopting the scheme, a business must ensure it is up-to-date with its VAT returns and payments.

What are the advantages of using the cash accounting scheme?
  • Automatic bad debt relief - because output tax is never declared until a payment is made by the customer
  • Cash flow benefits by delaying payment of output tax from invoice date until payment is made by a customer
  • Simplified record keeping - VAT can be accounted for through a cash book - no need for separate sales/purchase day books
  • The scheme is of particular benefit (for cash flow purposes) to a business that gives extended credit terms to its customers in relation to standard rated sales

What are the disadvantages of using the cash accounting scheme?
  • Input tax cannot be claimed until payment is made to a supplier
  • The scheme will not benefit a business where most/all sales are zero-rated e.g. a milkman
  • The scheme will not benefit a business where sales are paid for, either in advance of invoicing, or at the same time a sales invoice is raised

How does a business apply to join the cash accounting scheme?
  • There is no requirement to notify HMRC in advance of using the scheme
  • Scheme can be adopted by any eligible user (i.e. taxable sales of £1.35m or less) at the beginning of any VAT period
  • The scheme can only be used from a current VAT period i.e. no retrospective use

Will HMRC ever prevent a business from using the scheme?
  • As long as a business is up-to-date with its VAT returns and payments, and has not been convicted of a VAT offence within the last 12 months, then use of the scheme will always be allowed
  • A business must withdraw from the scheme if its taxable sales exceed £1.6m per year (VAT exclusive)

At what point may or must a business leave the scheme?
  • A business can voluntarily withdraw from the scheme at the end of any VAT period
  • A business must withdraw from the scheme if the value of its taxable supplies has exceeded £1.6m per annum
  • HMRC has the power to impose compulsory withdrawal in order to protect the tax yield

Information kindly provided by HfM Accountants.

Posted May 9, 2008

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