If you’re a vat registered trader that has got to pay vat as soon as you issue a vat invoice then you can opt for vat cash accounting scheme to delay your vat payments. Under this scheme you will have to pay vat only after your clients have paid against your vat invoice.
Under regular vat accounting, you will need to pay vat in the next vat return irrespective of whether your client has cleared payment of your vat invoice. This is especially true in case your business compels you to issue credit invoices more often than not. In such a case you’d end up paying the vat amounts in case your client does not make any payment at all. Thus, you’d find yourself paying vat even on your debt.
If you are a trader in the UK then you could easily shift to the cash accounting scheme in vat that’s offered by HM Revenue and Customs department or hmrc vat department. You’ll however be eligible for a this scheme vatnumbers only when your estimated taxable sales within the next year are not more than ?1.35 million. You will also have to exit the scheme as soon as your taxable sales touch ?1.6 million. You could also be able to make use of the cash accounting scheme along with other vat schemes like the annual accounting scheme.
It is possible to shift over to this scheme even without informing the hmrc vat department provided you are doing so at the beginning of any vat accounting period. You will however need to separate these invoices from your earlier vat invoices that you would have issued under the standard vat accounting scheme. There are several pros and cons while choosing the cash accounting scheme. The advantages are that if your customers pay you only after a few days, weeks or months you’ll need to cover vat only after receiving payments from those clients. It’s also possible to remain safe in the event any client fails to make payments.
The cons to this particular scheme are that you will need to keep specific payment records of all of your customers including providing additional evidence in the form of bank statements whenever required by hmrc. You will also have the ability to reclaim vat on any purchases only once you have paid your supplier. Just in case you decide to shift to standard vat accounting then you will also have to account for all pending vat amounts including any bad debts. You will also be barred from using vat cash accounting scheme by hmrc if you happen to end up making mistakes in vat calculations, get convicted in a vat offence or get penalized for vat evasion. When you do leave the scheme then you will have to account for all pending vat over the following Six months.
If you are a vat registered trader that sells services or goods mainly on credit but buys them against cash bills then this cash accounting scheme could be well suited for you. You could possibly avoid paying vat on bad debts and might only have to pay vat whenever your clients pay out. However, you should check with your vat agent and understand all advantages and disadvantages about the vat cash accounting scheme before you decide to go for this type of scheme.