If you are a vat registered trader that has got to pay vat as soon as you issue a vat invoice then you can certainly opt 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 regardless of whether your client has cleared payment of the vat invoice. This is especially true if your business compels that you issue credit invoices more often than not. When this occurs you’d end up paying the vat amounts in case your client does not make any payment at all. Thus, you’d find yourself paying vat even on the debt.
If you are a trader in the UK then you may easily shift over to the cash accounting scheme in vat that is offered by HM Revenue and Customs department or hmrc vat department. You’ll however qualify for this scheme vatnumbers only if your estimated taxable sales within the next year aren’t more than ?1.35 million. You will also need to exit the scheme once your taxable sales touch ?1.6 million. You might also be able to make use of 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 do so at the start of any vat accounting period. You will however have to separate these invoices from your 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 customers pay out only after a few days, weeks or months then you 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 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. Additionally, you will have the ability to reclaim vat on any purchases only once you have paid your supplier. In case you opt to shift to standard vat accounting then you’ll also have to account for all pending vat amounts including any bad debts. Additionally, you will be barred from using vat cash accounting scheme by hmrc if you happen to 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 take into account all pending vat within the next Six months.
If you are a vat registered trader that sells goods or services mainly on credit but buys them against cash bills then the cash accounting scheme could be well suited for you. You could possibly not pay vat on debt and may only need to pay vat whenever your clients pay out. However, you should check with your vat agent and understand all pros and cons regarding the vat cash accounting scheme before you opt for this type of scheme.