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If your customers take a long time to pay you then you could benefit from VAT cash accounting.
In this article we will explain what is cash accounting for VAT and how this differs from standard VAT accounting.
Typically, you pay VAT to HMRC based on invoice dates rather than payment dates.
Example 1
CRM Limited has built a cloud-based CRM platform that enables organisations to increase their sales by improving customer experiences and providing data insights. The company has annual sales of £750,000 and its next VAT accounting period ends on 31 March 2024 (and every 3 months thereafter).
CRM issues an invoice for £15,000 plus VAT of £3,000 to a new customer on 15 March 2024. The customer pays the invoice on 1 July 2024.
The invoice dated 15 March 2024 falls within the VAT quarter end 31 March 2024 so CRM needs to pay the £3,000 of VAT to HMRC by 7 May 2024 – almost 2 months before receiving the cash from the customer.
The VAT cash accounting scheme allows VAT to be paid only when you receive payment from customers and when you pay suppliers.
Example 2
Assuming all the facts in Example 1 are the same, except CRM Limited has joined the cash accounting scheme, the company would not need to pay the £3,000 VAT liability to HMRC until 7 November 2024. Under the cash accounting scheme CRM holds the £3,000 of VAT in its bank account for over 4 months before this needs to be paid to HMRC and has the opportunity to earn interest on this balance until the VAT liability is paid in November.
The examples above show the possible benefit of joining the VAT cash accounting scheme but the scheme may not help everyone (it will depend on how quickly your customers pay you and how promptly you pay your suppliers) and the scheme is not available to everyone.
You can use cash accounting if:
You are prohibited from joining the scheme if any of the following apply:
When your taxable turnover is more than £1.6m you must leave the scheme.
There are some transactions for which standard VAT accounting must be used, or where the standard VAT accounting may be more beneficial. These are the most common scenarios we see in the Tech sector:
You do not have to inform HMRC you use cash accounting but you can only join at the beginning of a VAT accounting period e.g. if you are using standard (invoice-based) VAT accounting in the quarter ending 31 March 2024, you cannot use cash accounting until 1 April 2024.
You can leave at any time but if you no longer meet the eligibility criteria you must leave the scheme. You should leave at the end of your VAT accounting period (usually the end of a calendar quarter).
There is no requirement to inform HMRC that you are leaving the cash accounting scheme but you must report and pay any outstanding VAT – even if your customers have not paid you - although it may be possible to repay the outstanding VAT over 6 months.
Yes. So long as the company does not exceed the cash accounting VAT threshold, VAT cash accounting can be used.
The VAT cash accounting scheme offers a practical solution for many small businesses by allowing them to account for VAT based on cash flow rather than invoices. This method simplifies VAT management by aligning VAT payments with actual cash received and paid out.
If you need any guidance to understand the benefits of VAT cash accounting for your business please get in touch.
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