If you are a vat registered trader that has to pay vat once you issue a vat invoice then you can go for vat cash accounting scheme to delay your vat payments. Under this scheme you will need to pay vat only after your customers have paid against your vat invoice.
Under regular vat accounting, you will have to pay vat during the next vat return irrespective of whether your client has cleared payment of your vat invoice. This is especially true in case your business compels you to issue credit invoices most of the time. When this occurs you’d end up paying the vat amounts in case your client does not make any payment whatsoever. Thus, you’d end up paying vat even on the debt.
If you’re a trader in the UK then you could easily shift to the cash accounting scheme in vat that is offered by HM Revenue and Customs department or hmrc vat department. You will however qualify for this scheme vatnumbers.com only if your estimated taxable sales in the next year aren’t greater than ?1.35 million. Additionally, you will need to exit the scheme once your taxable sales touch ?1.6 million. You might also have the ability to use the cash accounting scheme along with other vat schemes like the annual accounting scheme.
It is possible to shift to this scheme even without informing the hmrc vat department provided you are doing so at the beginning of any vat accounting period. You may however have to separate these invoices from your earlier vat invoices that you would have issued in the standard vat accounting scheme. There are several benefits and drawbacks while opting for the cash accounting scheme. The advantages are that if your customers pay out only after a couple of days, weeks or months then you need to pay vat only after receiving payments from those clients. It’s also possible to remain safe in case any client doesn’t make payments.
The cons to this particular scheme are that you will have to keep specific payment records of most of your customers including providing additional evidence in the form of bank statements whenever required by hmrc. You will also have the ability to reclaim vat on any purchases only after you have paid your supplier. Just in case you opt to shift to standard vat accounting then you will also have to take into account all pending vat amounts including any money owed. You will also be barred from using vat cash accounting scheme by hmrc if you happen to end up making mistakes in vat calculations, get convicted in a vat offence or get penalized for vat evasion. When you do leave the scheme you will have to take into account all pending vat within the next Six months.
If you’re a vat registered trader that sells goods or services mainly on credit but buys them against cash bills then the cash accounting scheme could be suitable for you. You could possibly avoid paying vat on debt and might only have to pay vat whenever your clients pay out. However, you should check with your vat agent and understand all advantages and disadvantages about the vat cash accounting scheme before you decide to go for such a scheme.