VAT
VAT
- Cash Accounting
Cash
accounting enables a business to account for and pay VAT on
the basis of cash received and paid rather than on the basis
of invoices issued and received.
Advantages
and Disadvantages of the Scheme
The
advantages of the scheme are as follows.
- Output
tax is not due until the business receives payment of its
sales invoices. If customers pay promptly, the advantage
will be limited. Even so, the gain may be material.
- There
is automatic bad debt relief because, if no payment is received,
no output tax is due.
- Most
businesses find it easier to think in terms of cash flows
in and out of their business than invoiced amounts.
The
potential disadvantages are as follows.
- There
is no input tax recovery until payment of suppliers’
invoices.
- The
scheme will not be beneficial for net repayment businesses
- for example, a business just starting up, which has substantial
initial expenditure on equipment, stocks etc so that input
tax exceeds the output tax, should delay starting to use
the scheme. That way, it recovers the initial input tax
on the basis of input invoices as opposed to payments.
Key
Rules
A
business can join the scheme if it has reasonable grounds
for believing that taxable turnover in the next 12 months
will not exceed £660,000 provided that it:
- is
up to date with VAT returns
- has
paid over all VAT due or agreed a basis for settling any
outstanding amount in instalments
- has
not in the previous year been convicted of any VAT offences.
All
standard and zero-rated supplies count towards the £660,000
except anticipated sales of capital assets previously used
within the business. Exempt supplies are excluded.
When a business joins the scheme, it must be careful not to
account again for VAT on any amounts already dealt with previously
on the basis of invoices issued and received.
A business can start using the scheme without informing Customs.
It does not cover:
- goods
bought or sold under lease or hire-purchase agreements
- goods
bought or sold under credit sale or conditional sale agreements
- supplies
invoiced where full payment is not due within six months
- supplies
invoiced in advance of delivering the goods or performing
the services.
Once
annual turnover reaches £825,000 the business must leave
the scheme immediately.
On leaving the scheme, VAT is due on all supplies on which
it has not already been accounted for. A new measure was announced
in the 2004 Budget to allow outstanding VAT to be accounted
for on a cash basis for a further six months after leaving
the scheme.
Accounting
for VAT
Output
tax must be accounted for when payment is received.
Cheque. Treated as received on the date the cheque
is received or if later the date on the cheque. If the cheque
is not honoured an adjustment can be made.
Credit/debit card. Treated as received/paid on the
date of the sales voucher.
Standing order/direct debits. Treated as received/paid
on the day the bank account is credited.
Part payments. VAT must be accounted for on all receipts/payments
even where they are part payments. Part payments are allocated
to invoices in date order (earliest first) and any part payment
of an invoice allocated to VAT by making a fair and reasonable
apportionment.
Records
Under
the cash accounting scheme the prime record will be a cash
book summarising all payments made and received with a separate
column for VAT. The payments need to be clearly cross-referenced
to the appropriate purchase/sales invoice.
In addition the normal requirements regarding copies of VAT
invoices and evidence of input tax apply.
How
We Can Help
We
can advise on whether the cash accounting scheme would be
suitable for your business.
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of page
For information of users: This material is published
for the information of clients. It provides only an overview
of the regulations in force at the date of publication, and
no action should be taken without consulting the detailed
legislation or seeking professional advice. Therefore no responsibility
for loss occasioned by any person acting or refraining from
action as a result of the material can be accepted by the
authors or the firm.
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