If you are a vat registered trader that has to pay vat as soon as you issue a vat invoice then you can certainly go for vat cash accounting scheme to delay your vat payments. Under this scheme you will need to pay vat only after your clients 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 if your business compels that you vat number search issue credit invoices more often than not. When this occurs you would end up paying of the vat amounts even in case your client does not make any payment whatsoever. Thus, you would end up paying vat even on the bad debts.
If you’re a trader in the UK then you may easily shift over to the cash accounting scheme in vat that’s offered by HM Revenue and Customs department or hmrc vat department. You’ll however qualify for this scheme only when your estimated taxable sales within the next year aren’t more than ?1.35 million. You will also need to exit the scheme as soon as your taxable sales touch ?1.6 million. You might also be able to make use of the cash accounting scheme along 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 need to separate these invoices from your earlier vat invoices that you’d have issued in the standard vat accounting scheme. There are several benefits and drawbacks while opting for the cash accounting scheme. The advantages are that when your customers pay out only after a few days, weeks or months you’ll need to pay vat only after receiving payments from those clients. You can also remain safe in the event any client doesn’t make payments.
The cons to this scheme are that you will need to keep specific payment records of all 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. In case you decide to shift over to standard vat accounting then you’ll also have to account for all pending vat amounts including any bad debts. You will also be barred from using vat cash accounting scheme by hmrc in case you find yourself making mistakes in vat calculations, get convicted in a vat offence or get penalized for vat evasion. When you do leave the scheme then you will have to account for all pending vat within the next Six months.
If you are a vat registered trader that sells services or goods 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 bad debts and might only have to pay vat when your clients pay you. However, you should check with your vat agent and understand all pros and cons about the vat cash accounting scheme before you decide to opt for this type of scheme.