If you’re a vat registered trader that has to pay vat once you issue a vat invoice then you can certainly 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 have 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 you to issue credit invoices more often than not. In such a case you’d find yourself paying the vat amounts even in case your client does not make any payment at all. Thus, you’d find yourself paying vat even on the bad debts.
If you’re a trader in Britain then you may 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 vatnumbers.com only if your estimated taxable sales within the next year aren’t more 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 over 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 have to separate these invoices from the earlier vat invoices that you would have issued under the standard vat accounting scheme. There are many benefits and drawbacks while choosing the cash accounting scheme. The advantages are that if your clients 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 once you have paid your supplier. Just in case you opt to shift to standard vat accounting then you will 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 in case you 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 then you will have to account for all pending vat within the next Six months.
If you are a vat registered trader that sells services or goods mainly on credit but buys them against cash bills then this cash accounting scheme might be suitable for you. You could possibly avoid paying vat on bad debts and might only need to pay vat whenever your clients pay out. However, you need to check with your vat agent and understand all advantages and disadvantages regarding the vat cash accounting scheme before you decide to go for this type of scheme.