The VAT Cash Accounting Scheme is a practical solution designed to support small businesses and sole traders in managing their VAT payments more efficiently. Under this scheme, businesses only pay VAT to HMRC once they’ve received payment from their customers, rather than when an invoice is issued.
Likewise, VAT on purchases can only be reclaimed after payments have been made to suppliers. This simplified approach is particularly beneficial for businesses facing cash flow challenges or dealing with late payments, offering greater flexibility and control over their finances.
How Does the VAT Cash Accounting Scheme Work?
This scheme aligns VAT payments and claims with your cash flow, offering a more practical approach to managing finances. Here’s how it works:
- You only account for VAT on sales once the customer has made a payment.
- You reclaim VAT on purchases only after you’ve paid your suppliers.
By focusing solely on money that has actually been received or paid, this approach reduces the financial burden of unpaid invoices or delayed customer payments. It also simplifies record-keeping by aligning your VAT obligations with your actual cash flow, making it easier to stay on top of your finances.
Eligibility for the VAT Cash Accounting Scheme
To be eligible for the VAT Cash Accounting Scheme, your business must meet the following requirements:
- Your VAT-taxable turnover must not have exceeded £1.35 million in the past 12 months or be expected to surpass this threshold in the next 12 months.
- You must have no outstanding VAT returns, unpaid VAT bills, or penalties for late payments. If you have any of the above click here to sort them out now
If your turnover exceeds £1.35 million, you’ll need to exit the scheme and transition to standard VAT accounting. However, businesses already enrolled in the scheme are allowed to stay until their turnover reaches £1.6 million, offering added flexibility to support growth.
What is the difference between invoice basis and cash basis VAT?
The key distinction between the Standard VAT Scheme (invoice basis) and the VAT Cash Accounting Scheme (cash basis) lies in when VAT is paid and reclaimed:
- Invoice Basis (Standard Scheme): VAT becomes due as soon as an invoice is issued, regardless of whether payment has been received. Similarly, VAT on purchases can be reclaimed upon receiving an invoice, even if the supplier hasn’t been paid yet.
- Cash Basis (VAT Cash Accounting Scheme): VAT is only accounted for when payments are received from customers or made to suppliers. This minimises the risk of paying VAT on invoices that have not yet been paid.
The VAT Cash Accounting Scheme is especially beneficial for businesses dealing with delayed payments, as VAT liabilities only arise once actual cash flow is realised.
When to leave VAT cash scheme?
You should consider leaving the VAT Cash Accounting Scheme if:
- Your VAT-taxable turnover exceeds £1.6 million, as you will no longer meet the eligibility criteria.
- Your business consistently receives prompt payments from customers and no longer experiences cash flow challenges. In this case, switching to the standard VAT scheme may be more advantageous, as it enables earlier VAT reclaims on purchases.
Before making the switch, carefully evaluate your business's financial position and cash flow requirements to ensure the decision aligns with your needs.
Benefits of the VAT Cash Accounting Scheme
The VAT Cash Accounting Scheme offers significant benefits for small businesses:
- Enhanced Cash Flow: You only pay VAT on payments you’ve actually received, reducing the financial pressure from unpaid invoices.
- Lower Risk: There's no need to pay VAT on invoices that remain unpaid by your customers.
- Streamlined Record-Keeping: Because VAT aligns with actual payments and receipts, tracking and managing your VAT becomes much simpler.
These advantages make the scheme especially appealing for businesses managing tight cash flow margins.
How Debitam Can Help
Struggling with VAT schemes? Debitam makes it easy! Our expert tax team helps you choose the right VAT scheme, handle registrations, file returns, and switch schemes hassle-free. Stay compliant and focus on growing your business. Contact Debitam today and simplify your VAT process!
