A Quick Guide to the VAT Cash Accounting Scheme
All businesses and sole traders in the UK who are registered for Value Added Tax (VAT) must use one of two accounting methods. A business owner can choose to use an invoice accounting scheme for VAT, or they can opt to join the VAT Cash Accounting Scheme. There are many benefits to this method, the VAT Cash Accounting Scheme is not a perfect solution for all types of businesses. The Mooncard team has taken the time to write this handy guide on what the VAT Cash Accounting Scheme is, who is eligible and how to join the scheme.
What is cash accounting?
Under a cash accounting method, a business records income when it is received and expenses are recorded as they are paid. The VAT Cash Accounting Scheme requires a business to pay its VAT to Her Majesty's Revenue and Customs (HMRC) only when customers have made payment for goods or services. This is different from an invoice-based VAT accounting method, where a business must pay VAT to HMRC as invoices are issued.
The VAT Cash Accounting Scheme can be beneficial for small business owners because it means that they are under no obligation to make VAT payments to HMRC until their own customers have paid them. This can greatly enhance a business’s cash flow and reduces the time required for VAT accounting processes.
One of the drawbacks to the VAT Cash Accounting Scheme is that a business cannot reclaim any VAT until it has paid the supplier. This is different from an invoice VAT accounting method, where a business can reclaim VAT on goods and services bought from suppliers based on invoices received from the suppliers.
Is my business eligible for the VAT Cash Accounting Scheme?
If you run a VAT-registered business that has a projected VAT taxable turnover of £1.35 million or less per year, then it is eligible to join the VAT Cash Accounting Scheme.
If your business earns more than £1.6 million in VAT taxable turnover, it must leave the VAT Cash Accounting Scheme. You cannot become part of the VAT Cash Accounting Scheme if your business:
- Uses the VAT Flat Rate Scheme
- Behind on its VAT returns or VAT payments
- Has committed a VAT offence during the last 12 months (VAT evasion, for example)
Business owners interested in joining should note that there are restrictions that are imposed on the VAT Cash Accounting Scheme. You cannot use the VAT Cash Accounting Scheme for the following transactions:
- Any VAT invoice with payment terms that are six months or longer
- Any transaction where a VAT invoice has been raised in advance
- When selling or buying goods using hire purchase, lease purchase, credit sale or conditional sale
- When importing goods from the EU into Northern Ireland
- If goods are moved outside a customs warehouse
Should I use the VAT Cash Accounting Scheme?
Businesses that have long periods of time between when they issue invoices and when customers make payments can benefit from the VAT Cash Accounting Scheme. The VAT Cash Accounting Scheme can also be beneficial for businesses that carry a lot of bad debt from unpaid invoices.
If your customers make payments immediately or within a short period of time or you reclaim more VAT from HMRC than you pay, the VAT Cash Accounting Scheme may not be a good option for your business. If your business buys stock on credit, then the VAT Cash Accounting Scheme may also not be the best fit.
How do I join the VAT Cash Accounting Scheme?
Like the VAT Retail Scheme and the VAT Margin Scheme, there is no requirement to inform HMRC that you wish to join the VAT Cash Accounting Scheme, unlike as is the case with the Flat Rate VAT Scheme or the VAT Annual Accounting Scheme. You can simply begin to use cash accounting methods at the start of a VAT accounting period.
Likewise, a business owner does not need to inform HMRC if they wish to stop using the scheme. All you have to do is to stop using the cash accounting method at the end of a VAT accounting period. However, it should be noted that you must still submit a VAT report and pay any outstanding VAT amounts to HMRC. In the case that your business’ VAT taxable turnover is more than £1.35 million in the last 3 months, then you must report this to HMRC and pay any outstanding VAT amounts immediately.
If your business has long lead times between when an invoice is issued and when your customers make payment, then you could benefit from using the VAT Cash Accounting Scheme. This will allow you to only make VAT payments when you have received cash payments from your customers, not as soon as the invoice is issued. If you are considering using the VAT Cash Accounting Scheme, it makes sense to get professional advice from a reputable accountant before doing so.
Many business owners find that they struggle to keep their VAT paperwork in good order. Mooncard can help you to streamline your VAT processes. You can book a no-obligation, free Mooncard demonstration online today.