The VAT Cash Accounting Scheme is one of the popular VAT schemes that I come across as an accountant. As with any scheme there are advantages and disadvantages of using the Cash Accounting Scheme but overall this seems to be one every business needs to consider. Here is an overview of the VAT Cash Accounting Scheme, how to figure out if you are eligible and work out whether it is right for you:
What is the VAT Cash Accounting Scheme?
Under the Standard VAT Scheme you pay/reclaim VAT every time you send or receive an invoice. However the Cash Accounting Scheme is different in that:
- You pay over VAT each quarter based on the money your customers have paid you;
- You reclaim VAT on your purchases based on what you have paid your suppliers.
VAT Cash Accounting Threshold
To join the VAT Cash Accounting Scheme your VAT taxable turnover must be £1.35 million or less.
Taxable turnover is the value of your sales that would be relevant for charging the standard rate of VAT, currently 20%, excluding any sales that would be exempt from VAT (such as insurance or some financial services).
It is your responsibility to monitor your taxable turnover to make sure you remain within the VAT cash accounting threshold.
How to Apply to Join the VAT Cash Accounting Scheme
You don’t actually need to notify HMRC that you wish to use the VAT cash accounting scheme, you can just adopt this method at the start of a VAT quarter or as soon as you VAT register.
You should be aware that you cannot use the VAT Cash Accounting Scheme if:
- you’re not up to date with your VAT Returns or payments
- you’ve committed a VAT offence in the last 12 months, for example VAT evasion
Advantages of the VAT Cash Accounting Scheme
- It’s great for cashflow, especially if you’re customers have been slow payers in a particular quarter;
- You’ll never pay VAT over to HMRC if you experience a bad debt.
Disadvantages of the VAT Cash Accounting Scheme
- You cannot reclaim VAT on purchases that you have not paid for so this scheme may not suit you if you have a significant amount of purchases if you carry stock or are starting up a business;
- You shouldn’t switch between the cash and standard VAT schemes each quarter, so you need to commit to the scheme once you have chosen to use it.
How to Leave the VAT Cash Accounting Scheme
You must leave the scheme once your taxable turnover exceeds £1.6m. You should leave at the end of a VAT quarter not part way through and again, you don’t need to tell HMRC but you should keep VAT records noting what you have done and your calculations.