Cash Accounting

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Cash accounting scheme for VAT

What is cash accounting?

Cash accounting enables you to account for VAT on the basis of payments received and made  instead of on tax invoices issued and received.

The VAT payable or  repayable for each accounting period will be the difference between the  total amount of VAT included  in payments received from your customers and the total amount of VAT included in payments made to your suppliers.

Who can use the scheme?

Cash accounting is open to you if you are a registered trader with an expected taxable turnover not exceeding 1,350,000 in the next twelve  months. The main conditions are that you should have made all necessary VAT returns and have made  arrangements with HM Revenue  & Customs to clear any arrears of VAT payments.

There is no need to apply to use the scheme, but you should start to  use it at the beginning of a tax period.

Will it be beneficial to me?

It all depends on the period of time between your issuing sales  invoices and receiving payment from your customers. The longer the time  lag, the more of benefit cash accounting is likely to be. If you are  usually paid as soon as you make a sale (e.g. if you use a retail  scheme) you will normally be worse off under cash accounting. The same  applies to the situation where you regularly receive repayments of VAT (e.g. because you make zero-rated supplies).

The potential disadvantage arises because you will no longer be able  to take credit for VAT when  you receive a tax invoice; you will have to wait until you have actually made the appropriate payment.

One major advantage of the scheme is that it simplifies your  bookkeeping requirements, and many businesses can be controlled simply  by using an appropriately analysed cash book. Another important  advantage is that the problem of VAT on bad debts disappears - under conventional VAT accounting you have to pay VAT whether you have been paid by your customer or  not, and VAT bad debt relief  is not available until the debt is at least six months old.

What conditions are there once I start using the scheme?

You must use it for the whole of your business and must normally stay in it for at least two years (unless you exceed the turnover limit).  However, you are allowed to leave the scheme at any time if you are not  gaining any benefit or if your accounting system cannot cope with the  requirements.

You must be careful that you do not account again for any VAT on receipts and payments already  dealt with on invoices issued and received before you started using the  scheme.

Businesses are no longer able to use the scheme for sales of goods  and services invoiced in advance of the supply being made, or for sales  where the payment is not due for more than six months after the invoice  date.

What records must I keep?

The main accounting record will be a cash book summarising all  payments made and received, with a separate column for the relevant VAT. You will also need to keep the  corresponding tax invoices and ensure that there is a satisfactory  system of cross-referencing.

These VAT records must be  kept for six years, unless you have agreed a shorter period with your local VAT office.

Are there any special rules for cheques and credit cards?

A cheque receipt occurs on the date you receive the cheque or the  date on the cheque, whichever is the later. If the cheque is  subsequently dishonoured, you should adjust the VAT account accordingly.

Likewise, a cheque payment takes place on the date you send the  cheque to your supplier or the date on the cheque, whichever is the  later. However, if your cheque is dishonoured you cannot reclaim the VAT.

Credit card payments are to be accounted for by the date on the sales voucher - not the date you receive payment from, or make payment to,  the card company.

What about part payments?

You must account for VAT each time you make or receive a payment, even if it is a part payment, and  even if it is a payment in kind. Normally the VAT will be calculated using the VAT fraction (currently 7/47).  However, a fair and reasonable apportionment must be applied if there is a mixed supply at different rates.

What if my turnover exceeds 1,350,000?

There is a 25% tolerance built into the scheme. This means that once  you are using cash accounting, you can normally continue to use it until the annual value of your taxable supplies reaches 1,600,000.

You must review your taxable turnover in the year ending at the end  of each tax period. If you exceed the tolerance of 1,600,000, you must  leave the scheme immediately, unless HM Revenue & Customs allows or directs otherwise.

All outstanding tax must be accounted for within six months of the  period in which you leave the scheme.

Do contact us if you would like more help or advice in this area.

Vector Accountants in St Ives, Huntingdon are professionally trained business advisers and management accountants specialised in helping SME companies be successful; as well as bookkeeping and VAT returns we offer executive coaching and mentoring for new business, start ups and established companies looking to improve performance, increase profits and pay less tax. 

Located between Huntingdon, Cambridge and Peterborough we typically serve clients in the East of England (Cambridgeshire, Suffolk, Norfolk, Essex, Lincs) and the East Midlands (Bucks, Beds, Herts, Leics), but with a global network of  professionally accredited  advisers and accountants in 28 countries across the globe location is not a limitation.

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