VAT Cash Accounting Explained

 In VAT

VAT Cash Accounting Explained

The Chancellor announced in the Autumn Statement changes to the VAT Flat Rate scheme, so it might be time to consider the Cash Accounting VAT scheme for your business.

How does the Cash Accounting Scheme Work?

Ordinarily, a business on the Cash Accounting Scheme deducts the VAT on what they buy (inputs) from the VAT charged on what they sell (outputs).

The outputs are deducted from the inputs, to give the balance payable to HMRC.

Example

  • You invoice a customer for £100 (net) and add VAT at 20%, which is £20 in output VAT. The total the customer pays is £120.
  • You buy some stationery for £60, including £10 of VAT in input VAT.
  • You deduct the input VAT of £10 (for the stationery) from your output VAT of £20 (charged on sales) which gives a net amount payable to HMRC of £10.
  • As the customer pays the output VAT of £20, you make a saving of £10 on the stationery in reclaimed input VAT.  £20 – £10 = £10 saved.

What are the benefits?

  • Effectively being on the cash accounting scheme means that the business benefits from being able to reclaim the VAT back on VATable goods and services purchased for your business, when ordinarily you would not be able to do so if you were not VAT registered. This can potentially save the business thousands in tax.

What are the disadvantages?

  • One consideration is that if you are a business that sells to non VAT registered businesses or consumers, then charging VAT will make your services more expensive. Consumers who are not VAT registered will be unable to reclaim the VAT charged to them.
  • Generally, the cash accounting scheme suits business-to-business transaction based businesses rather than business-to-consumer transaction based businesses as the clients you invoice to will be able to reclaim the VAT charged to them, making your services no more expensive.
  • There is additional accounting knowledge required to account for individual goods; knowing what items are VATable, at what percentage, and what items are not.

What is the VAT threshold?

The threshold for VAT registration is currently turnover of £83,000 or more. If you are over this amount in any twelve-month period, you must become VAT registered.

What’s the Bottom line?

If you are over the threshold for VAT registration, then you must register for VAT and have the option to join either the cash accounting or Flat Rate VAT Scheme. If you are below the threshold, you can opt to register for VAT voluntarily if this would prove more financially beneficial for your business. Please contact us to discuss which option is best for you.

 

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