VAT — cash accounting

Cash account­ing enables a busi­ness to account for and pay VAT on the basis of cash received and paid, rather than on the basis of invoic­es issued and received.

Advantages and Disadvantages of the Scheme

The advan­tages of the scheme are as fol­lows:

• Out­put tax on sales income is not due until the busi­ness receives pay­ment of its sales invoic­es. If cus­tomers pay prompt­ly, the advan­tage will be lim­it­ed. Even so, the gain may be mate­r­i­al.
• There is auto­mat­ic VAT bad debt relief because, if no pay­ment is received, no out­put tax is due.
• Most small­er busi­ness­es find it eas­i­er to think in terms of cash flows in and out of their busi­ness than invoiced amounts.

The poten­tial dis­ad­van­tages are as fol­lows:

• There is no input tax recov­ery until pay­ment of sup­pli­ers’ invoic­es is made.
• The scheme will not be ben­e­fi­cial for net repay­ment busi­ness­es — for exam­ple, a busi­ness just start­ing up, which has sub­stan­tial ini­tial expen­di­ture on equip­ment, stocks etc. so that input tax exceeds out­put tax, should nor­mal­ly delay join­ing the scheme. That way, it can make use of the accru­als basis to recov­er the ini­tial input tax on the basis of invoic­es received, as opposed to pay­ments made.

Key Rules

A busi­ness can join the scheme if it has rea­son­able grounds for believ­ing that tax­able turnover in the next 12 months will not exceed £1,350,000 and pro­vid­ed that it:

• is up to date with VAT returns
• has paid over all VAT due or has agreed with HMRC a basis for set­tling any out­stand­ing amount in instal­ments
• has not in the pre­vi­ous year been con­vict­ed of any VAT offences.

All stan­dard and zero-rat­ed sup­plies count towards the £1,350,000 thresh­old except antic­i­pat­ed sales of cap­i­tal assets pre­vi­ous­ly used with­in the busi­ness. Exempt sup­plies are exclud­ed from the cal­cu­la­tion.

When a busi­ness joins the scheme, it must be care­ful not to account again for VAT on any amounts already dealt with pre­vi­ous­ly on the basis of invoic­es issued and received.

A busi­ness can start using the scheme with­out inform­ing HMRC.

The cash account­ing scheme does not cov­er:

• goods bought or sold under lease or hire-pur­chase agree­ments
• goods bought or sold under cred­it sale or con­di­tion­al sale agree­ments
• sup­plies invoiced where full pay­ment is not due with­in six months
• sup­plies invoiced in advance of deliv­er­ing the goods or per­form­ing the ser­vices.

Once annu­al tax­able turnover exceeds £1,600,000 the busi­ness must leave the scheme imme­di­ate­ly.

On leav­ing the scheme, in prin­ci­ple VAT becomes due on all sup­plies on which it has not already been account­ed for. Unclaimed input tax on invoic­es received can be off­set against the out­put tax. How­ev­er in order to smooth the tran­si­tion from cash account­ing to accru­als account­ing HMRC allows a peri­od where­by all VAT that is out­stand­ing at the date of leav­ing the scheme can still be account­ed for on a cash basis for a fur­ther six months after leav­ing the scheme.

Accounting for VAT

Out­put tax must be account­ed for when pay­ment is received. There are spe­cif­ic rules for dif­fer­ent types of pay­ment:

Cheque

Treat­ed as received on the date the cheque is received or if lat­er, the date on the cheque. If the cheque is not hon­oured an adjust­ment can be made.

Credit/debit card

Treat­ed as received/paid on the date of the sales vouch­er.

Stand­ing order/direct deb­its

Treat­ed as received/paid on the day the bank account is cred­it­ed.

Part pay­ments

VAT must be account­ed for on all receipts/payments even where they are part pay­ments. Part pay­ments are allo­cat­ed to invoic­es in date order (ear­li­est first) and any part pay­ment of an invoice allo­cat­ed to VAT by mak­ing a fair and rea­son­able appor­tion­ment.

Records

Under the cash account­ing scheme the prime record will be a cash book that sum­maris­es all pay­ments made and received with a sep­a­rate col­umn for VAT. The pay­ments need to be clear­ly cross-ref­er­enced to the appro­pri­ate purchase/sales invoice.

In addi­tion the nor­mal require­ments regard­ing copies of VAT invoic­es and evi­dence of input tax apply.