Using standard VAT accounting, you pay VAT on your sales whether or not your customer has paid you. Using cash accounting, you do not need to pay VAT until your customer has paid you. If your customer never pays you, you never have to pay the VAT.
You can use cash accounting if your estimated VAT taxable turnover during the next tax year is not more than £1.35 million.
You can continue to use cash accounting until your VAT taxable turnover exceeds £1.6 million.
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Using standard VAT accounting you:
Using the Cash Accounting Scheme, you:
You can use the Cash Accounting Scheme if your estimated VAT taxable turnover during the next tax year is not more than £1.35 million. Your VAT taxable turnover includes any standard, reduced and zero-rated sales and other VAT taxable supplies, but excludes VAT itself, supplies that are exempt from VAT, and capital asset sales.
Once you start to use cash accounting, you can continue to do so until your VAT taxable turnover reaches £1.6 million.
You cannot use cash accounting if:
Even if you use cash accounting, you must still account for VAT using standard VAT accounting when you:
Using cash accounting may help your cash flow, especially if your customers are slow payers. You do not need to pay VAT until you have received payment from your customers. So if a customer never pays you, you don't have to pay VAT on that bad debt as long as you continue to use the Cash Accounting Scheme.
Dependant on your own circumstances, there may be some disadvantages to using cash accounting:
Changing to cash accounting doesn't mean you can just keep a record of your cash position - you must also keep track of debtors and creditors, so you know the real position with regard to what you owe and are owed. You need this information for Income Tax or Corporation Tax purposes.
In addition to keeping all required VAT records and accounts for standard VAT accounting, you must also use the following procedures for sales and purchases.
If you are paid in cash you must, if asked by your customer, endorse the customer's copy of your sales invoice with the amount and date paid.
If you settle an invoice using cash, you must keep a copy of the purchase invoice endorsed with the amount and date paid.
Your records must clearly cross-refer payments received or made by you to the corresponding sales or purchase invoices. You must also make sure that you cross-refer these payments and receipts to evidence such as bank statements, cheque stubs and paying-in slips.
You do not need to complete an application form or advise HM Revenue & Customs (HMRC) to start using the Cash Accounting Scheme.
You can start using the Cash Accounting Scheme:
If you are already registered for VAT when you start using cash accounting, you must make sure that you do not account for VAT twice on any sales or purchases. You must identify and separate any transactions in your records that you have already accounted for using standard VAT accounting.
You may leave the Cash Accounting Scheme voluntarily at the end of any VAT accounting period. You do not need to notify HMRC. You can rejoin at the beginning of any VAT accounting period, provided you meet the criteria at that point in time.
You must leave the scheme if your VAT taxable turnover is over £1.6 million.
HMRC may also withdraw your use of the Cash Accounting Scheme for a number of reasons, including:
Once you have left the scheme you must account for any outstanding VAT. You can either:
But the option of a further six months is not available if:
You may be able to use the Cash Accounting Scheme together with some of the following VAT schemes:
Using annual VAT accounting, you make nine monthly or three quarterly interim payments throughout the year. You only need to complete one VAT Return at the end of the year when you either make a balancing payment or receive a balancing refund.
You can't use the Cash Accounting Scheme with the Flat Rate Scheme. Instead, the Flat Rate Scheme contains its own cash-based turnover method.
If you are a retailer, there are several schemes where you can simplify your calculation of VAT by not having to account for VAT on each individual sale.
If you buy or sell second-hand goods, antiques, collectibles or art, you only need to account for VAT on the difference between the price you paid for an item and the price at which you sell it - your margin.
The Tour Operator's Margin Scheme makes VAT accounting easier for tour operators who buy and sell travel, accommodation and certain other services internationally.