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 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 regardless of whether your client has cleared payment of the vat invoice vatvalidation. This is also true in case your business compels that you issue credit invoices more often than not. In such a case you would end up paying the vat amounts even in case your client does not make any payment whatsoever. Thus, you would end up paying vat even on your bad debts.
If you’re a trader in Britain then you may 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 only when your estimated taxable sales within the next year aren’t more than ?1.35 million full article. 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 with other vat schemes like the annual accounting scheme.
You can shift over to this scheme even without informing the hmrc vat department provided you do so at the start of any vat accounting period. You may however need to separate these invoices from the earlier vat invoices that you’d have issued under the standard vat accounting scheme. There are several benefits and drawbacks while opting for the cash accounting scheme. The advantages are that when your clients pay out only after a few days, weeks or months you’ll need to pay vat only after receiving payments from those clients. It’s also possible to remain safe in case any client fails to make payments.
The cons to this scheme are that you will have to maintain specific payment records of all of your customers including providing additional evidence in the form of bank statements whenever required by hmrc. You will also be able to reclaim vat on any purchases only once you have paid your supplier. In case you decide to shift to standard vat accounting then you’ll also need to account for all pending vat amounts including any bad debts. Additionally, you will 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 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 suitable for you. You could avoid paying vat on bad debts and might only have to pay vat when your clients pay out. However, you should check with your vat agent and understand all pros and cons about the vat cash accounting scheme before you decide to go for such a scheme.