If you are a vat registered trader that has to pay vat once you issue a vat invoice then you can opt for vat cash accounting scheme to delay your vat payments. Under this scheme you will only have to pay vat only after your customers have paid against your vat invoice.
Under regular vat accounting, you will have to pay vat in the next vat return regardless of whether your client has cleared payment of your vat invoice. This is especially true in case your business compels that you issue credit invoices more often than not. When this occurs you’d find yourself paying of the vat amounts even in case your client does not make any payment at all. Thus, you would find yourself paying vat even on your bad debts.
If you are a trader in the UK then you could easily shift to the cash accounting scheme in vat that is made available from HM Revenue and Customs department or hmrc vat department. You will however qualify for this scheme https://vatnumbers.com only if your estimated taxable sales within the next year are not greater than ?1.35 million. Additionally, you will have to exit the scheme once your taxable sales touch ?1.6 million. You could also be able to make use of the cash accounting scheme with other vat schemes such as the annual accounting scheme.
It is possible to shift to this scheme even without informing the hmrc vat department provided you do so at the start of any vat accounting period. You may however have to separate these invoices from your earlier vat invoices that you’d have issued in the standard vat accounting scheme. There are many pros and cons while opting for the cash accounting scheme. The advantages are that if your clients pay you only after a few days, weeks or months then you 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 scheme are that you will need to keep specific payment records of most your clients 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. Just in case you opt to shift over to standard vat accounting then you’ll also have to take into account all pending vat amounts including any money owed. Additionally, you will 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. When you do leave the scheme you will have to account for all pending vat over the following Six months.
If you’re a vat registered trader that sells goods or services mainly on credit but buys them against cash bills then this cash accounting scheme could be well suited for you. You could possibly avoid paying vat on debt and may only have to pay vat whenever your clients pay out. However, you should seek advice from your vat agent and understand all pros and cons regarding the vat cash accounting scheme before you decide to opt for this type of scheme.