If you are a vat registered trader that has to pay vat once 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 clients have paid against your vat invoice.
Under regular vat accounting, you will have to pay vat in the next vat return irrespective of whether your client has cleared payment of the vat invoice. This is especially true in case your business compels you to issue credit invoices most of the time. In such a case you would end up paying of the vat amounts even in case your client fails to make any payment whatsoever. Thus, you’d find yourself paying vat even on the debt.
If you’re a trader in the UK then you may easily shift over to the cash accounting scheme in vat that’s offered by HM Revenue and Customs department or hmrc vat department. You will however be eligible for a this scheme vatnumbers only if your estimated taxable sales in the next year are not greater than ?1.35 million. You will also need to exit the scheme once your taxable sales touch ?1.6 million. You might also be able to make use of the cash accounting scheme along with other vat schemes such as the annual accounting scheme.
You can 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 need to separate these invoices from your earlier vat invoices that you’d have issued under the standard vat accounting scheme. There are many benefits and drawbacks while choosing the cash accounting scheme. The pros are that if your customers pay you 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 case any client doesn’t make payments.
The cons to this scheme are that you will need to maintain 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 be able to reclaim vat on any purchases only after you have paid your supplier. In case you decide to shift over to standard vat accounting then you will also need to take into account all pending vat amounts including any bad debts. 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. When 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 services or goods mainly on credit but buys them against cash bills then the cash accounting scheme might be suitable for you. You could avoid paying vat on bad debts and may only need to pay vat whenever your clients pay you. However, you need to seek advice from your vat agent and understand all pros and cons about the vat cash accounting scheme before you opt for such a scheme.