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VAT Cash Accounting Scheme: A Helpful Guide for Business Owners

Nov 28, 2022 | Tax & Accounting, Business, European VAT, VAT Payment

Must Know Facts about VAT Cash Accounting Scheme

The Cash Accounting Scheme lets you account for VAT (output tax) on your sales based on payments you receive rather than tax invoices you issue. The usual regulations call for you to account for VAT on your sales when you send a VAT invoice, even if your client has not paid you. This is different.

If you decide to use the program, you can only recoup the input tax (VAT) you paid once you have paid your supplier.

Even if you haven’t paid your supplier yet, you can still recover VAT from purchases you make using the standard way of accounting for VAT. In this blog, you will find out the VAT cash accounting scheme in a precise manner. 

Vat Cash Accounting Scheme
VAT Cash Accounting Scheme: A Helpful Guide for Business Owners 5

VAT cash accounting benefits

If you employ the “normal” VAT scheme, the date you issue an invoice determines how much VAT you are required to charge for goods and services.

Therefore, even if the bills haven’t been paid and haven’t reached your bank account, you must pay HMRC the remaining amount of any VAT you’ve requested every three months.

The same logic applies to any purchases you make for your company. Whether or not you have paid the invoice, the standard VAT system enables you to recoup any VAT that appears on bills owed to your business. 

Only VAT that has physically changed hands is accounted for under the Cash Scheme; this is the date that your bills were paid or that you paid the invoices of other companies.

Eligibility of cash accounting 

If you satisfy the following requirements, you may begin using the program:

  • You anticipate that the value of your taxable supplies will be £1,350,000 or less in the upcoming year. For further information on calculating the value of your taxable supplies, visit our website. 
  • You have not yet submitted any VAT Returns.
  • You haven’t been guilty of a VAT offence in the last year.
  • You haven’t accepted a proposal to drop charges for a VAT infraction in the previous year.
  • You haven’t received a fine for dishonest behaviour-related VAT avoidance in the previous year. You don’t owe HMRC any money, or if you do, you’ve devised a plan to pay off all of your outstanding VAT with them (including surcharges and penalties). 
  • If you haven’t received a letter from HMRC in the past year, the use of the programme will end. HMRC has declined to allow you to participate in the programme and has not contacted you.
  • You follow the instructions given in this notice.
Arif 72 Vat Cash Accounting Scheme: A Helpful Guide For Business Owners
VAT Cash Accounting Scheme: A Helpful Guide for Business Owners 6

Cash accounting is not an option if: 

  • You haven’t submitted or paid your VAT returns on time.
  • Having been found guilty of a VAT infraction
  • Have paid a fine for VAT fraud in the previous year.

Joining the cash accounting scheme 

Unlike many other tax-related products, you (or your accountant) won’t formally register your firm. Even though there is no necessity to register, you should only start accounting for VAT on a cash basis at the start of a new VAT quarter.

Leaving the cash accounting scheme 

Only after a tax period can we discontinue using the cash accounting system. When you leave the scheme, you must start using the invoice accounting technique at the start of the subsequent tax year.

HMRC has comprehensive information about quitting the plan; however, consult an accountant if you have any questions.

Advantages and Disadvantages

Enrolling in this VAT plan offers various benefits for cash flow. For instance, you won’t be required to account for the VAT on any unpaid bills until you have received payment if a client is paying you slowly.

In reality, if you accumulate bad debts, the VAT component won’t ever need to be paid to HMRC.

Depending on your particular circumstances, there can be various drawbacks. For instance, if you buy a significant amount of goods on credit, you could run into issues since you cannot claim the VAT on any transactions you make.

Arif 74 Vat Cash Accounting Scheme: A Helpful Guide For Business Owners
VAT Cash Accounting Scheme: A Helpful Guide for Business Owners 7

Features of a cash accounting scheme

After configuring the system to be compatible with the VAT cash accounting scheme, you may do the following:

Report information about client payments received in the Payments section of the output file produced by the SAFT-PT: XML File Creation (RSAFT PT XML) report.

Once you have received payment from consumers, you may print payment receipts for them using the Payment Receipts: VAT on Cash (Portugal) (FIEUAR VAT RECEIPT) report.

Accounting for VAT when clients fail to pay

Which technique you select to account for your VAT will determine how you should address a bad debt, which is when a customer fails to pay you for a specific invoice.

If you use the cash accounting method, the VAT on the invoice is not due to HMRC until the client has paid you.

However, if you use the invoice accounting technique, the VAT would have been paid to HMRC in the quarter in which the invoice is raised.

Since your consumer won’t be paying it back to you, you can try to reclaim the VAT from HMRC as bad debt relief, but there are limitations.

For instance, even if you know before that time that your client won’t pay you (for example, if they’ve gone into liquidation), you may only claim back bad debt relief on obligations over six months old.

Arif 75 Vat Cash Accounting Scheme: A Helpful Guide For Business Owners
VAT Cash Accounting Scheme: A Helpful Guide for Business Owners 8

Conditions you must meet

You must typically occupy it for at least two years and use it for the entirety of your business (unless you exceed the turnover limit). However, if you are not benefiting from the plan or your accounting system cannot handle the criteria, you are free to exit anytime.

If you want to use the scheme, you can only reclaim the VAT incurred on your sale when you have to pay the supplier for the simple payment method if you can track your invoice of purchasing the goods or services.  

Frequently Asked Questions 

  • What documents must I maintain?

    The primary accounting document will be a cash book that includes a distinct column for the applicable VAT and summarizes all payments made and received. Additionally, you must maintain the related tax invoices and ensure an effective mechanism for cross-referencing. Unless you and HMRC have agreed to a shorter time, you must keep these VAT records for a minimum of six years.

  • How about part payments?

    Whether it is a partial or payment in kind, you must account for VAT each time you receive or make a payment. Typically, the VAT portion (now 1/6th) will be used to determine the VAT. A fair and reasonable apportionment must be used if there is a mixed supply at various rates. 

  • What if my revenue is more than £1,350,000?

    In the plan, a tolerance of 25% has been created. In other words, once you begin using cash accounting, you can generally continue until your taxable supply’s annual value reaches £1,600,000. Unless HMRC approves or directs differently, you must leave the programme at the end of the subsequent VAT accounting period if your taxable turnover exceeds £1,600,000. Your taxable turnover must be routinely audited.

Conclusion 

Employing the VAT Cash Accounting Scheme is advantageous for many small firms. You have to account for VAT only when you receive the money, rather than having to pay HMRC back for VAT you billed for but haven’t yet collected from clients.

As a result, if your company qualifies, it makes sense from the cash flow management perspective. If you still have doubts about the VAT Cash accounting scheme, then you can contact Sterlinx without any hesitation.

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