Under standard VAT accounting, VAT is payable on sales whether or not the customer has paid and can lead to a claim for Bad Debt Relief. Under the Cash Accounting Scheme, VAT does not need to be paid until the customer has paid.

If the customer does not pay, then the VAT is not payable. This clearly has cash flow benefits for any business that sells on credit. Using standard VAT accounting principles, a business pays VAT on their sales whether or not their customer has paid them.

A business can enter this scheme provided that they are registered for VAT and the estimated VAT taxable turnover for the next VAT year is less than £1.35 million. Furthermore, they can continue to use the scheme until the VAT taxable turnover reaches £1.6 million. Once they reach the £1.6 million, they must withdraw from the scheme.

Businesses cannot use the Flat Rate Scheme together with the Cash Accounting Scheme. The Flat Rate Scheme has its own cash-based method for calculating turnover. Nor can they use the scheme if they are behind with their VAT payments, filing returns or have committed a VAT offence in the last 12 months.

Moreover, businesses cannot use the VAT cash accounting scheme for certain transactions, for example:

• Transactions with payment terms exceeding six months
• Transactions with an invoice raised in advance
• Transactions on goods imported from the EU
• Transactions using lease purchase, hire purchase, conditional sale or credit sale

Businesses do not need to complete an application form or advise HMRC to start using the Cash Accounting Scheme. They can commence using the Cash Accounting Scheme at the beginning of any VAT period or - if they are not already registered for VAT - from the day their VAT registration starts.

Businesses can leave the Cash Accounting Scheme voluntarily at the end of any VAT accounting period. They do not need to notify HMRC. They can then rejoin the scheme at the beginning of any VAT accounting period, provided they continue to meet the necessary criteria.

If you would like more advice regarding the VAT Cash Accounting Scheme and how it can benefit your business, please contact us at info@gkaccountingservices.com or call us on 01269 508 081, where we will be more than happy to answer any of your questions.