Businesses and charities can encounter cash flow issues for a variety of reasons. This blog covers one VAT scheme that can be helpful when considering cash flow problems arising as a result of customers who do not pay on time. The VAT Cash Accounting Scheme is available to some businesses and allows payment and recovery of VAT based on payments rather than invoices. This can be useful if customers are slow to pay and your business pays more VAT than it recovers.
VAT Cash Accounting Scheme
Cash accounting allows businesses to account for VAT on the basis of cash received and paid as opposed to ‘normal’ VAT accounting, which operates on accounting for VAT on the basis of invoices issued and received and requires payment of output VAT even where the customer has not yet paid. This can create cash flow problems for businesses who are paying VAT on income which they have not yet received, especially if they do not have much VAT to recover on costs. When operating cash accounting output VAT is due either when payment is made and input VAT is reclaimable on the same terms.
However, it is not available to all businesses. To be eligible for the scheme the estimated taxable turnover for the business in the next 12 months must not exceed £1.35million. Having entered the scheme, if taxable turnover (excluding VAT) exceeds £1.6million in a year then the business must cease to use the scheme.
Even if the turnover condition is met, there are exceptions which mean some businesses still do not qualify for the scheme. Cash accounting cannot be used if:
- Your business currently operates the VAT Flat Rate Scheme. The Flat Rate Scheme offers a separate cash-based turnover method. More information on calculating turnover for the Flat Rate Scheme is available in VAT Public Notice 733
- Your business has any outstanding VAT returns
- You have been convicted of a VAT offence within the last year
- You have accepted an offer to compound proceedings in connection with a VAT offence within the last year
- You have an outstanding debt to HMRC with no arrangement in place to clear the entire debt
- You have been assessed to a penalty for VAT evasion involving dishonest conduct within the last year
- HMRC has withdrawn your use of the scheme within the last year
- HMRC has denied you access to the scheme
If your business is eligible to use the scheme, then it must be applied to the entirety of the business; you cannot recover VAT based on invoices and declare VAT based on cash received. If your business is already registered for VAT and you are eligible to use the scheme you may use the scheme from the start of your next VAT period. There is no need to apply to use the scheme but you must avoid accounting for VAT twice on any supplies made or received before you began to use the scheme.
In order to do this you must, from the date you start to use the scheme, identify and separate in your records any payments you receive or make for transactions already accounted for under the normal method of VAT accounting. Exclude such payments from your cash accounting scheme records. A similar adjustment must also be made in respect of purchase invoice where VAT was claimed before the invoice was paid.
The scheme is subject to certain exceptions which aim to simplify the scheme and assist in the cash flow of smaller businesses and also to prevent the scheme being used for tax avoidance. The following are excluded from the scheme and must be dealt with under standard VAT accounting rules:
- goods which are bought or sold under lease purchase, hire purchase, conditional sale or credit sale agreements
- goods imported or acquired from an EU member state
- goods on which the purchaser must account for output tax on his VAT Return on the supplier’s behalf due to the reverse charge
There are also two types of transaction which are excluded from cash accounting in order to prevent abuse. The first such exclusion is supplies for which an invoice is issued and payment of that invoice is not due in full within six months. The second is supplies for which a VAT invoice is issued in advance of making the supply. Any transactions which are excluded from the scheme must be dealt with under normal VAT accounting procedures.
This table aims to demonstrate the potential advantages and disadvantages of using the scheme:
|Output tax is not due until the business receives payment of its invoices.||No input VAT recovery until you pay the supplier|
|Automatic bad debt relief as no output VAT ever becomes due means a smaller administrative burden as well as a cash flow advantage.||Not beneficial if you are normally a “repayment trader”|
Whilst the table provides a summary of the advantages and disadvantages, whether the scheme is the right option for your business is a question which must always be considered on a case by case basis. If you think that the scheme may be of benefit to your business, you may wish to seek a professional opinion on whether it would be of overall benefit to your business.
There are more detailed rules applying to the scheme which are not discussed in this blog which relate to particular transactions. If you would like to discuss in more detail, then please do not hesitate to contact Constable VAT. You can also read more in Notice 731.
If you need any advice on the Cash Accounting Scheme, or any other VAT matter, please do not hesitate to contact Constable VAT.
This blog is intended as a general guide to current VAT issues and is not intended to be a comprehensive statement of the law. No liability is accepted for the opinions it contains or for any errors or omissions. Constable VAT cannot accept responsibility for loss incurred by any person, company or entity as a result of acting, or failing to act, on any material in this newsletter. Specialist VAT advice should always be sought in relation to your particular circumstance.