If your business qualifies, and you are not already using the scheme, the VAT Cash Accounting scheme could be a lifesaver, especially during times when lenders refuse to lend!
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.
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