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Blog VAT Accounting Schemes – The VAT Cash Accounting Scheme

VAT Accounting Schemes – The VAT Cash Accounting Scheme

15 August 2014

Special VAT accounting schemes for small businesses have been available for a number of years, but they are still underused. The 3 main schemes are: cash accounting, annual accounting and the flat rate scheme.

In this, the first of three brief guides we will be looking at how the VAT Cash Accounting Scheme work and how they can help businesses.

Cash AccountingThe cash accounting scheme

Cashflow can often be a headache for businesses. Were it not for this scheme, VAT would be due based on invoice dates, which means paying HMRC on unpaid invoices at the end of each period. The Cash Accounting scheme enables businesses to account for VAT on the basis of payments received and made instead.

Input tax not being deductible until purchase invoices are paid is a disadvantage, but as the norm is making a profit, the scheme is usually beneficial.

The Cash Accounting scheme can be used by businesses with an expected taxable turnover not exceeding £1,350,000 in the next 12 months. The business must also be up to date with its VAT payments or have agreed a plan with HMRC for clearing any outstanding debts.

The key factor in deciding whether or not to use the Cash Accounting scheme is the period of time between issuing sales invoices and receiving payment – the longer the gap, the stronger the case for Cash Accounting. Clearly, it would also not be advantageous for repayment traders to use it where input tax regularly exceeds output tax.

Other advantages are:

Advantages• simplified accounting, in that well-analysed cash and bank records are usually enough; and
• no need for VAT relief on bad debts because it is not paid to HMRC up front.

There are other conditions for using the scheme, such as having to use it for the whole of a business and normally staying in it for at least 2 years, but these are not usually a burden.

Businesses can leave the scheme at any time if they are not benefiting from it or struggling with the accounting requirements. Records must be kept in such a way that invoices issued and received can be easily cross-referred to payment dates but that is usually straightforward.

It is not compulsory to leave the scheme and revert to accruals-based accounting until annual taxable turnover reaches £1,600,000. This built in 25% tolerance gives flexibility for growing businesses. On leaving the scheme, all outstanding tax must be paid within 6 months of the leaving date.

Our next article in this series will be published on 22 August 2014 and will be covering the Annual Accounting Scheme.

If you feel your business could benefit from the Cash Accounting scheme or would just like to speak to someone to find out a little more then please call Lee Taylor on 01206 512476 or email by clicking here.