VAT Cash Accounting Scheme 3rd July 2013

Posted in: VAT

The VAT cash accounting scheme is another one of the many VAT schemes for smaller businesses. Under the normal VAT rules, the “tax point” for a supply will determine which VAT return period an output or input relates to. Generally, this means if you’ve invoiced a customer your tax point is the invoice date and you are required to account for the output and pay it to HMRC even if the customer has not yet settled the invoice.

This can be a disadvantage where your supplies are credit based or you have bad debts and can lead to cash flow problems. To reclaim the output VAT on a bad debt a trader will have to wait 6 months before they can reclaim the VAT.

The VAT cash accounting scheme lets a trader account for VAT not at the tax point, but when the cash is actually paid or received. Using this scheme, there is automatic bad debt relief.

To use the VAT cash accounting scheme, your estimated turnover (exclusive of VAT) for the next 12 months must not exceed £1,350,000. All VAT returns must be up to date and outstanding VAT amounts paid. You must also have a clean VAT record, not having committed a VAT offence in the last 12 months.

If these conditions are met, it is not necessary to apply or even notify HMRC that a trader is to use the cash accounting scheme.

You must leave the scheme if your turnover in the 12 months to the end of a return period exceeds £1,600,000. Again, you don’t have to tell HMRC that you are leaving the scheme, but you must pay any outstanding VAT.