Usually when you account for VAT you would use the date you receive invoices for expenses or send out invoices to customers for when to account for the VAT on income and expenses.
Unfortunately this can cause some problems for cash flow, especially if you have customers who do not pay right away and you still have to pay the VAT you haven’t received yet to HM Revenue and Customs (HMRC).
If you have this problem it may be worth looking at the Cash Accounting Scheme (CAS). With the CAS you account for VAT on the date you receive or pay out money.
Who can use the CAS?
You can use the scheme if your estimated taxable turnover for the year is no more than £1.35 million. VAT taxable turnover is all turnover subject to VAT at 20%, 5% and 0% but not including the VAT itself. You also do not include income from the sale of business assets or VAT exempt turnover. Once you start using the CAS you can use it until your VAT taxable turnover exceeds £1.6 million.
You cannot use the CAS if you not up to date with your VAT returns and payments or if you have been convicted of a VAT offence or charged a penalty for VAT evasion in the last year.
Even if you are using the CAS there are some cases where you still need to account for VAT in the standard way. This is when you:
- Buy or sell goods using lease purchase, hire purchase, conditional sale or credit sale.
- Import or acquire goods from other EU countries.
- Remove goods from a customs warehouse or free zone.
- Issue a VAT invoice that isn’t due to be paid for six months or more.
- Issue a VAT invoice in advance of providing goods or services.
Advantages of the CAS
The CAS may help you with cash flow where sales are concerned by only having to pay VAT to HMRC in the quarter you receive payment. This helps ensure that you have funds available to pay any VAT you owe. In addition, if a customer doesn’t pay your invoice, then you don’t have to pay VAT on the bad debt.
Disadvantages of the CAS
You cannot reclaim VAT on expenses until you have actually paid for them. This can be a problem if you buy most of your goods and services on credit.
If you normally reclaim more VAT than you pay, it is likely that you will receive your repayments later unless you pay for all purchases straight away.
If you apply for the CAS upon start up of your business, there could be a delay in reclaiming VAT on your start up costs, unless they are paid straight away.
If you leave the CAS, you will have to pay the VAT on the outstanding invoices, including any bad debts.
Additional changes in using the CAS
There are a couple of changes you may need to make to the way you keep your records if you use the CAS. For invoicing customers, you will have to endorse the customer’s copy of an invoice with the date paid and amount, you will also need to have purchase invoices endorsed in the same way.
You must also cross reference payments received or made to the corresponding purchase or sales invoices. These also need to be cross referenced with evidence of payment, such as bank records, cheque stubs and paying-in slips.
Joining and leaving the CAS
You do not need to complete a form or apply to HMRC in order to join the CAS, you can start using the CAS from the beginning of any VAT period, or from the beginning of your VAT registration if you have just registered. If you have already been using the standard VAT scheme make sure you do not account for any amounts of VAT twice.
You can voluntarily leave the CAS at the end of any VAT period and rejoin at the beginning of any future VAT period, although you must leave if your VAT taxable turnover exceeds £1.6 million. As with joining there is no need to let HMRC know. HMRC may withdraw your use of the CAS if you exceed the VAT taxable turnover limit, calculate your VAT incorrectly or if you are subject to a conviction for a VAT offence of a penalty for VAT evasion.
Upon leaving you can either account for any remaining VAT on unpaid invoices in the next VAT period or opt to within 6 months of leaving the CAS. If HMRC withdraws your use of the CAS you cannot opt for the 6 months option.
The CAS cannot be used in addition to the Flat Rate Scheme when accounting for VAT.
If you would like any assistance or advice regarding the above, or VAT in general, please do not hesitate to contact us.