If your business is struggling with cash flow and VAT payments, the VAT cash accounting scheme might be the solution you need. But, what is VAT Cash Accounting? Read on to learn how this scheme can help you manage your VAT liabilities more effectively and improve your business’s financial health!
VAT Cash Accounting Scheme Explained
Paying Value-Added Tax (VAT) can be burdensome for businesses, particularly those struggling with cash flow or having long payment terms with their customers. But the good thing is VAT Cash Accounting Scheme is an easier option.
As an overview of VAT cash accounting, it allows eligible businesses to account for VAT based on the cash they receive and pay rather than on the invoices they issue and receive.
This means businesses only pay VAT on their sales once they have received the payment from customers and can claim VAT on their purchases once they have paid their suppliers.
In this blog, we will further zoom in on what is VAT Cash Accounting and provide a comprehensive guide to help you consider whether to join the scheme. So, let us dive in and explore VAT Cash Accounting in greater detail.
What is the VAT Cash Accounting Scheme?
The VAT Cash Accounting Scheme is an alternative way of accounting for VAT available to eligible businesses. We will discuss which are qualified to use this VAT accounting method later.
Under this scheme, upon preparation of VAT return, businesses are only required to account for VAT on the payments they receive and make.
This differs from the usual VAT return, where businesses compute their VAT liability from the invoices issued and claim VAT from invoices received, regardless of the timing of cash receipts or payments.
In short, when businesses are under the VAT cash accounting, they will only pay VAT on their sales once their customers have paid, and they can reclaim VAT on their purchases once they have paid their suppliers.
To further understand, let us give you an example. Suppose you issue an invoice for £1,200, including VAT, to be paid by the customer later.
Typically, under the normal VAT requirement by HM Revenue & Customs (HMRC), you have to consider £200 as your VAT liability regardless of whether you have received payment from your customer.
However, under the Cash Accounting Scheme, you are only obligated for the £200 once you have actually received the full amount (£1,200).
For a more detailed and complete discussion of what is VAT cash accounting, you may visit the HMRC website.
Who is eligible for the VAT Cash Accounting Scheme?
The VAT Cash Accounting Scheme is available to most businesses with a yearly turnover of less than £1.35 million. An eligible business would have a good VAT payment record and not be convicted of any VAT-related offenses in the past year.
The scheme is particularly beneficial for businesses that experience cash flow difficulties or have extended payment terms with their customers.
By only paying VAT on the cash received, these businesses can improve their cash flow and manage their VAT liabilities more effectively.
However, businesses that are usually paid as soon as they make a sale or reclaim VAT more regularly than they pay VAT may not benefit from this scheme.
How to join or leave the VAT Cash Accounting Scheme?
If you are eligible for the VAT Cash Accounting Scheme and wish to join, you can complete the relevant section of your VAT registration form or by completing form VAT600 (CAS) and sending it to HMRC.
You can also join the scheme online through the HMRC website if you are registered for online VAT services.
Once you have joined the scheme, you will remain in it until you voluntarily leave or your turnover exceeds £1.6 million per year.
If you decide to leave the scheme, you must inform HMRC in writing and return to the standard method of accounting for VAT from the start of your next VAT accounting period.
Frequently Asked Questions
Can I rejoin the VAT Cash Accounting Scheme if I leave?
If you leave the VAT Cash Accounting Scheme, you may not be able to rejoin for at least 12 months.
However, suppose you leave the scheme because you have breached the eligibility criteria or have outstanding VAT liabilities. In that case, you may only be able to rejoin if you fulfill certain conditions set by HMRC.
What are the advantages of using the VAT Cash Accounting Scheme?
The main advantage of using the VAT Cash Accounting Scheme is that it can help businesses manage their cash flow more effectively.
By only paying VAT on the cash received, businesses can avoid paying VAT on outstanding invoices and reduce the risk of financial difficulties.
The scheme can also make it easier for businesses to budget for VAT payments and improve their overall financial management.
What are the disadvantages of using the VAT Cash Accounting Scheme?
One disadvantage of using the scheme is that businesses may have to wait longer to reclaim VAT on their purchases, as they can only claim back VAT once they have paid their suppliers.
Additionally, the scheme may not be suitable for businesses that regularly receive VAT repayments from HMRC, as they would have to wait longer to receive their refunds.
We tackled the basics of the VAT Cash Accounting Scheme that you need to know. However, what are the benefits of VAT cash accounting for your business and whether it is the right option will depend on your consideration of both the benefits and limitations.
You may seek Sterlinx Global for more valuable and specific tax advice for your business.