If you are a vat registered trader that has got to pay vat as soon as you issue a vat invoice then you can opt for vat cash accounting scheme to delay your vat payments. Under this scheme you will have 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 regardless of whether your client has cleared payment of your vat invoice. This is also true in case your business compels that you vat number search issue credit invoices more often than not. When this occurs you’d find yourself paying of the vat amounts even in case your client fails to make any payment whatsoever. Thus, you’d end up paying vat even on the debt.
If you’re a trader in Britain 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 will however qualify for this scheme only if your estimated taxable sales in the next year are not more than ?1.35 million. Additionally, you will need to exit the scheme as soon as your taxable sales touch ?1.6 million. You could also have the ability to use the cash accounting scheme along with other vat schemes such as the annual accounting scheme.
You can shift to this scheme even without informing the hmrc vat department provided you are doing so at the start of any vat accounting period. You will however need to separate these invoices from your earlier vat invoices that you would have issued under the standard vat accounting scheme. There are several benefits and drawbacks while opting for the cash accounting scheme. The pros are that when your customers pay out only after a few days, weeks or months you’ll need to cover vat only after receiving payments from those clients. It’s also possible to remain safe in the event any client fails to make payments.
The cons to this particular scheme are that you will have to maintain specific payment records of most your clients including providing additional evidence in the form of bank statements whenever required by hmrc. You will also be able to reclaim vat on any purchases only once you have paid your supplier. 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 money owed. You will also be barred from using vat cash accounting scheme by hmrc in case you 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 then you will have to take into account all pending vat over the following 6 months.
If you are a vat registered trader that sells services or goods mainly on credit but buys them against cash bills then the cash accounting scheme could be well suited for you. You could avoid paying vat on bad debts and might only have to pay vat whenever your clients pay you. However, you should check with your vat agent and understand all pros and cons regarding the vat cash accounting scheme before you decide to opt for such a scheme.