The scheme allows businesses to account for VAT (output tax) on sales on the basis of payments received, rather than on tax invoices issued.
This is different from the normal rules that require businesses to account for VAT on sales when issuing a VAT invoice, even if the customer has not made payment
However, if businesses choose to use the scheme, they can only reclaim the VAT incurred on purchases (input tax) once they have paid their supplier. Under the normal method of accounting for VAT businesses can reclaim VAT on purchases made as soon as they receive a VAT invoice even if they have not paid the supplier.
The scheme could help with cash flow, because in general it means VAT does not have to be paid to HMRC until the customer has paid. The scheme will be especially helpful if businesses give customers extended credit or suffer a lot of bad debts.
However, the scheme may not give you any benefit if the business
- is usually paid as soon as a sale is made
- regularly reclaims more VAT than paid
- make continuous supplies of services
If a business finds the scheme is of no benefit, it can stop using it at the end of a VAT accounting period and return to the normal method of accounting for VAT.
Businesses are eligible to start using the scheme if they meet the following conditions:
- they expect the value of taxable supplies in the next year will be £1,350,000 or less
- they have no VAT Returns outstanding
- they have not been convicted of a VAT offence in the last year
- they have not accepted an offer to compound proceedings in connection with a VAT offence in the last year
- they have not been assessed to a penalty for VAT evasion involving dishonest conduct in the last year
- they do not owe HMRC any money or if they do, they have made arrangements with them to clear the total amount of the outstanding VAT payments (including surcharges and penalties)
- HMRC has not written to them withdrawing use of the scheme during the last year
- HMRC has not written to them and denied you access to the scheme
Because VAT is notoriously complex it’s worth taking expert advice on how how VAT cash accounting could benefit your business. Why not give us a call today to discuss or read more about how we can help with VAT issues.
