Saturday 22 August 2009

Vat: Pay it when you get paid

Currently banks have less money to lend, and when they do lend interest rates charged are "realistic".

Consequently the management of your cash resources is critical as businesses chase liquidity by tightening their credit control, - likely to be frustrated as debtors hang on to cash reserves by extending the credit they take from suppliers.

If your business qualifies, and you are not already using the scheme, the VAT Cash Accounting scheme could well be a lifesaver.

What is cash accounting?

Using standard VAT accounting you:



  • pay VAT on any invoices you have issued, even if you have not received the payment from your customer.
  • reclaim VAT on any invoices you have received, even if you have not yet paid your supplier
Using cash accounting for VAT, you:



  • pay VAT on your sales when your customers pay you
  • reclaim VAT on your purchases when you have paid your suppliers

Cash accounting enables you to account for VAT on the basis of payments received and made instead of on tax invoices issued and received.

The VAT payable or repayable for each accounting period is the difference between the total amount of VAT included in payments received from your customers and the total amount of VAT included in payments made to your suppliers.

Who can use the scheme?

The scheme is open to any VAT registered business with expected annual taxable sales of £1.35m or less. (Taxable supplies include any standard, reduced and zero-rate sales and other taxable supplies, but excludes VAT itself, supplies that are exempt from VAT, and capital asset sales.).
Once you start to use cash accounting, you can continue to do so until your turnover reaches £1.6 million.

The main conditions are that you should have made all necessary VAT returns and made arrangements with HM Revenue & Customs to clear any arrears of VAT payments.
How does a business apply to join the cash accounting scheme?

There is no requirement to notify HMRC in advance of using the scheme. It Scheme can be adopted by any eligible user (i.e. taxable sales of £1.35m or less) at the beginning of any VAT period but can only be used from a current VAT period i.e. no retrospective use.
What conditions are there once I start using the scheme?




  • You must use it for the whole of your business and must normally stay in it for at least two years (unless you exceed the turnover limit). However, you are allowed to leave the scheme at any time if you are not gaining any benefit or if your accounting system cannot cope with the requirements.
  • You must be careful that you do not account again for any VAT on receipts and payments already dealt with on invoices issued and received before you started using the scheme.
  • You may no longer use the scheme for sales of goods and services invoiced in advance of the supply being made, or for sales where the payment is not due for more than six months after the invoice date..

What are the advantages of using the cash accounting scheme

  • Using cash accounting may help your cash flow, especially if your customers are slow payers.
  • You do not need to pay VAT until you have received payment from your customers. So if a customer never pays you, you don't have to pay VAT on that bad debt as long as you continue to use the cash accounting scheme. Under conventional VAT accounting you have to pay VAT whether you have been paid by your customer or not, and VAT bad debt relief is not available until the debt is at least six months old
What are the disadvantages of using the cash accounting scheme?



  • Input tax cannot be claimed until payment is made to a supplier
  • The scheme will not benefit a business where most/all sales are zero-rated e.g. a milkman
  • The scheme will not benefit a business where sales are paid for, either in advance of invoicing, or at the same time a sales invoice is raised.
  • Using cash accounting may affect your cash flow in that:
  • You cannot reclaim VAT on your purchases until you have paid your suppliers. This can be a disadvantage if you buy most of your goods and services on credit.
  • If you regularly reclaim more VAT than you pay, you will usually receive your repayment later under cash accounting than under standard VAT accounting, unless you pay for everything at the time of purchase.
  • If you provide continuous services such as accounting or other professional services.
  • If you start using cash accounting when you start trading, you will not be able to reclaim VAT on most start up expenditure, such as initial stock, tools or machinery, until you have actually paid for those items.
  • If you leave the cash accounting scheme if your turnover goes over £1.6 million or directed to so by HMRC you will have to account for all outstanding VAT due including any bad debts.
Will it benefit me?

It will benefit you if your sales are pedominantly standard-rated amd made on extended credit terms.
It will not usually benefit you if your sales are chiefly cash or zero-rated becuase you cannot claim the input tax attributable to your purchases until you pay your suppliers.

What records must I keep?

Changing to cash accounting doesn’t mean you can just keep a record of your cash position - you must also keep track of debtors and creditors, so you know the real position with regard to what you owe and are owed. You need this information for Income Tax or Corporation Tax purposes.

In addition to keeping all required VAT records and accounts for standard VAT accounting, you must also use the following procedures for sales and purchases.

Invoices




  • If you are paid in cash you must, if asked by your customer, endorse the customer's copy of your sales invoice with the amount and date paid.
  • If you settle an invoice using cash, you must keep a copy of the purchase invoice endorsed with the amount and date paid.
Payment records

Your records must clearly cross refer payments received or made by you to the corresponding sales or purchase invoices. You must also make sure that you cross refer these payments and receipts to evidence such as bank statements, cheque stubs and paying-in slips

These requirements are easily met by keeping a cash book summarising all payments made and received, with a separate column for the relevant VAT. You will also need to keep the corresponding tax invoices and ensure that there is a satisfactory system of cross-referencing.

These VAT records must be kept for six years, unless you have agreed a shorter period with your local VAT office.

Are there any special rules for cheques and credit cards?

A cheque receipt occurs on the date you receive the cheque or the date on the cheque, whichever is the later. If the cheque is subsequently dishonoured, you should adjust the VAT account accordingly.

Likewise, a cheque payment takes place on the date you send the cheque to your supplier or the date on the cheque, whichever is the later. However, if your cheque is dishonoured you cannot reclaim the VAT.

Credit card payments are to be accounted for by the date on the sales voucher - not the date you receive payment from, or make payment to, the card company.

What about part payments?

You must account for VAT each time you make or receive a payment, even if it is a part payment, and even if it is a payment in kind. Normally the VAT will be calculated using the VAT fraction (currently 3/23). However, a fair and reasonable apportionment must be applied if there is a mixed supply at different rates.

What if my turnover exceeds £1,350,000?

There is a 25% tolerance built into the scheme. This means that once you are using cash accounting, you can normally continue to use it until the annual value of your taxable supplies reaches £1,600,000.

You must review your taxable turnover in the year ending at the end of each tax period. If you exceed the tolerance of £1,600,000, you must leave the scheme immediately, unless HMRC allows or directs otherwise.

All outstanding tax must be accounted for within six months of the period in which you leave the scheme.

Will HMRC ever prevent a business from using the scheme?


  • As long as a business is up-to-date with its VAT returns and payments, and has not been convicted of a VAT offence within the last 12 months, then use of the scheme will always be allowed.
  • A business must withdraw from the scheme if its taxable sales exceed £1.6m per year (VAT exclusive)
At what point may or must a business leave the scheme?


  • A business can voluntarily withdraw from the scheme at the end of any VAT period
  • A business must withdraw from the scheme if the value of its taxable supplies has exceeded £1.6m per annum

When you must not use cash accounting

Even if you use cash accounting, you must still account for VAT using standard VAT accounting when you:


  • buy or sell goods using lease purchase, hire purchase, conditional sale or credit sale
  • import goods or acquire goods from other EU states
  • remove goods from a Customs warehouse or free zone
  • issue a VAT invoice and full payment is not due within six months
  • issue a VAT invoice in advance of providing goods or services
HMRC may also withdraw your use of the cash accounting scheme for a number of reasons, including:
  • if you calculate your VAT incorrectly
  • if you are convicted of a VAT offence
  • if you are assessed for a penalty for VAT evasion
  • if your turnover has gone over £1.6m and you have not notified HMRC
Once you have left the scheme you must account for any outstanding VAT within six months.

If you leave the scheme, you can rejoin at the beginning of any VAT accounting period, provided you meet the criteria at that point in time.

Using cash accounting for VAT with other schemes

Annual Accounting

You may be able to use cash accounting for VAT together with the annual accounting scheme.
Using annual VAT accounting, you make nine monthly or three quarterly interim payments throughout the year. You only need to complete one VAT return at the end of the year when you either make a balancing payment or receive a balancing refund.

Flat Rate Scheme

You can’t use the Cash Accounting Scheme with the Flat Rate Scheme. Instead, the Flat Rate Scheme contains its own cash-based turnover method.

Retail schemes

If you are a retailer, there are several schemes where you can simplify your calculation of VAT by not having to account for VAT on each individual sale.

Margin schemes for second-hand goods, art, antiques, collectibles

If you buy or sell second-hand goods, antiques, collectibles or art, you only need to account for VAT on the difference between the price you paid for an item and the price at which you sell it - your margin.

Tour operator's margin scheme

The tour operator's margin scheme makes VAT accounting easier for tour operator's who buy and sell travel, accommodation and certain other services internationally. There is more about VAT and tour operators in VAT Notice 709/5
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