VAT - CASH ACCOUNTING SCHEME

The VAT cash accounting scheme is useful for small businesses, as you only repay VAT to HMRC once you have received payment yourself. You can join the cash accounting scheme if your estimated turnover for the following tax year is not greater than £1.35m, and you can continue to use the scheme until your turnover is greater than £1.6m.

Benefits of the VAT Cash Accounting scheme - Under the standard VAT scheme, you must repay VAT on any invoices you have issued, whether or not you have received payment from the customers. Under the cash scheme, you only repay VAT once you have been paid yourself.  Under the standard VAT scheme, you can reclaim VAT on things you have purchased, even if you have yet to pay your supplier. Under the cash scheme, you can only reclaim for the VAT paid on purchases once you have paid your suppliers.

Can you use the Cash Accounting scheme? - Your business should be eligible to use the scheme if you meet the threshold requirement, unless your VAT affairs are not up-to-date.

Pros and Cons - The main benefit of joining this VAT scheme is in the cash flow benefits it provides. If you have a late paying client, for example, you will not have to account for the VAT on any outstanding invoices until you have been paid. There may be some disadvantages, depending on your specific situation. For example, as you cannot reclaim the VAT on any purchases you make, this could cause problems if you buy a substantial amount of stock on credit.

Joining the Cash Accounting Scheme - You do not need to inform HMRC if you want to join the scheme. However, you must start at the beginning of a new VAT quarter (if you are already registered for VAT), or from the first day you become VAT registered. You can also leave the scheme at the end of any VAT quarter, if necessary, or if your taxable turnover reaches the £1.6m mark.

VAT Pages ► VAT Summary ■ VAT Rates & Limits ■ VAT Cash Accounting ■ VAT Flat Rate Scheme ■