If you’re a vat registered trader that has got to pay vat as soon as you issue a vat invoice then you can opt for vat cash accounting scheme to delay your vat payments. Under this scheme you will only need to pay vat only after your customers have paid against your vat invoice.
Under regular vat accounting, you will need to pay vat during the next vat return irrespective of whether your client has cleared payment of the vat invoice. This is especially true if your business compels that you issue credit invoices more often than not. When this occurs you’d end up paying the vat amounts even in case your client fails to make any payment whatsoever. Thus, you would find yourself paying vat even on your bad debts.
If you’re a trader in Britain then you could easily shift over to the cash accounting scheme in vat that’s made available from HM Revenue and Customs department or hmrc vat department. You’ll however be eligible for a this scheme vat verification only when your estimated taxable sales within the next year aren’t greater than ?1.35 million. You will also have to exit the scheme as soon as your taxable sales touch ?1.6 million. You could 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 will however need to separate these invoices from your earlier vat invoices that you’d have issued under the standard vat accounting scheme. There are many pros and cons while choosing the cash accounting scheme. The advantages are that if your clients pay out only after a few days, weeks or months then you need to cover vat only after receiving payments from those clients. You can also remain safe in the event any client fails to 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. In case you opt to shift over to standard vat accounting then you’ll also need to account for 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 find yourself making mistakes in vat calculations, get convicted in a vat offence or get penalized for vat evasion. Once you do leave the scheme then you will need to account for all pending vat over the following 6 months.
If you’re a vat registered trader that sells services or goods mainly on credit but buys them against cash bills then the cash accounting scheme might be well suited for you. You could possibly not pay vat on debt and may only need to pay vat when your clients pay you. However, you need to check with your vat agent and understand all pros and cons regarding the vat cash accounting scheme before you go for this type of scheme.