If you’re a vat registered trader that has to pay vat once you issue a vat invoice then you can go for vat cash accounting scheme to delay your vat payments. Under this scheme you will need to pay vat only after your clients have paid against your vat invoice.
Under regular vat accounting, you will need to pay vat during the next vat return irrespective of whether your client has cleared payment of your vat invoice. This is also true if your business compels you to issue credit invoices most of the time. When this occurs you’d end up paying the vat amounts in case your client fails to make any payment at all. Thus, you’d end up paying vat even on the bad debts oil trading.
If you’re a trader in the UK then you may easily shift to the cash accounting scheme in vat that’s offered by HM Revenue and Customs department or hmrc vat department. You will however qualify for this scheme only when 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 might also have the ability to use the cash accounting scheme with other vat schemes such as the annual accounting scheme.
You can shift over to this scheme even without informing the hmrc vat department provided you do so at the beginning of any vat accounting period. You will however need to separate these invoices from the earlier vat invoices that you would have issued in the standard vat accounting scheme. There are many benefits and drawbacks while opting for the cash accounting scheme. The pros are that if 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 particular scheme are that you will have to maintain specific payment records of most of your customers including providing additional evidence in the form of bank statements whenever required by hmrc. You will also have the ability to reclaim vat on any purchases only once you have paid your supplier. Just in case you opt to shift over to standard vat accounting then you will also have to account for all pending vat amounts including any bad debts. You will also 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. Once you do leave the scheme you will have to take into account all pending vat within the next 6 months belly dancing.
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 avoid paying vat on debt and might only need to pay vat whenever your clients pay out. However, you need to seek advice from your vat agent and understand all advantages and disadvantages about the vat cash accounting scheme before you opt for this type of scheme.
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