If you’re 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 only have to pay vat only after your clients have paid against your vat invoice.
Under regular vat accounting, you will need to pay vat during the next vat return regardless 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 more often than not. In such a case you’d end up paying the vat amounts even in case your client fails to 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 be eligible for a this scheme vat numbers 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 as soon as your taxable sales touch ?1.6 million. You might also be able to use the cash accounting scheme with other vat schemes such as 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 start of any vat accounting period. You will however need to separate these invoices from your earlier vat invoices that you would have issued in the standard vat accounting scheme. There are many pros and cons while choosing the cash accounting scheme. The pros are that when your customers pay you only after a few days, weeks or months you’ll need to pay vat only after receiving payments from those clients. You can also remain safe in case 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. Additionally, you will have the ability to reclaim vat on any purchases only after you have paid your supplier. Just in case you decide to shift to standard vat accounting then you’ll also need 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 in case you 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 have to take into account all pending vat over the following 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 not pay vat on debt and may only need to pay vat whenever your clients pay out. However, you should check with your vat agent and understand all advantages and disadvantages regarding the vat cash accounting scheme before you decide to opt for this type of scheme.