Should I be using the VAT cash accounting scheme?

Normally VAT registered businesses account for VAT as it is shown on their sales invoices.  Therefore on your quarterly VAT returns you will need to pay over the VAT on all sales invoices that you have raised to customers in that quarter, even if you haven’t received payment for that invoice from the customer.  This can be a cashflow burden on any business, especially a startup, as it can mean that the business has to pay over money to HMRC that it has not yet received from customers.

A potential solution to this is the VAT cash accounting scheme.  If you use this scheme it means that you only pay over to HMRC VAT on sales invoices that you have already received payment for from your customers.  Likewise however it means you can only recover VAT on purchase invoices you have physically paid in the period.

So the benefit of using the cash accounting scheme is that if your customers are slow payers then there is a cashflow advantage by using the scheme in that you only pay over VAT you have received from your customers.  This also alleviates any issues around recovering VAT on bad debts, as you would have never paid over the VAT to HMRC on invoices that turn out to be bad debts, as the payment wouldn’t have been received from your customer.

As pointed out above if you use the scheme you will only be able to reclaim VAT on purchases that you have physically paid for.  Therefore if you regularly make purchases on credit and take some time to pay these invoices then potentially there could be a cashflow disadvantage as it will take longer for you to be able to reclaim this VAT under the cash accounting scheme.

Therefore you will need to make sure that using the scheme will leave your business with a cash advantage.

In order to use the scheme your VAT filings and returns must be up to date and your estimated VAT taxable turnover for the next 12 months cannot be more than £1.35m.  Once you start using the scheme you can do so until your VAT taxable turnover reaches £1.6m per annum, after which point you must return to the standard VAT accounting scheme.

A business can commence using the scheme and can also voluntarily leave the cash accounting scheme at the start of any VAT quarter and HMRC do not need to be notified.  Obviously when starting or ceasing to use the scheme you need to be careful to ensure that no VAT is double counted during the crossover period.

There are some restrictions on when the cash accounting cannot be used so its always worth getting advice or looking at the guidance on the HM Revenue & Customs website.