This is the last in the series on VAT guides and we are looking at the cash accounting scheme. Now normally you pay over the amount of VAT shown on your sales and purchase invoices regardless of whether or not the invoices have been paid. This is known as accrual accounting. Under cash accounting you only pay over the VAT once the invoice has been physically paid.
How do you join the scheme?
In order to join the scheme your business must be registered for VAT and your expected turnover for the next 12 months must be below £1.35m. You are also not allowed to join this scheme if you are behind with current VAT payments or have previously committed a VAT offence.
This scheme also cannot be used along side the flat rate scheme because the flat rate scheme is based on percentages, it can however be used along side the annual accounting scheme.
You must leave the scheme if your turnover exceeds £1.6m and you do this automatically without having to inform HMRC.
It is very simple to join the cash accounting scheme – you don’t even have to tell HMRC that you are operating the cash accounting scheme. The only thing you have to do is join it at the beginning of a VAT quarter.
If you use Xero or other bookkeeping software in the VAT settings you can toggle on the cash accounting option and your bookkeeping software will perform the VAT calculations for you.
Advantages of this scheme
- Helps to improve cash flow because if the sale invoice hasn’t been paid then no VAT is due on it.
- Automatic bad debt relief – if the invoice hasn’t been paid you didn’t pay across VAT in the first place.
Disadvantages of this scheme
- You cannot recover input VAT until the purchase invoice has been paid.
- If you usually receive a repayment of VAT then this would not be beneficial. Also if you are a start-up with lots of expenses initially you would not receive relief until the invoice was paid.
Conclusion
You don’t want to be paying over VAT and using up your cash reserves when your customers haven’t paid you. So if you tend to have debtors who take a while to pay their invoices then this scheme is ideal.
If you are a start-up then we would recommend that you wait a couple of quarters until your start-up costs are out the way before joining this scheme.