If you are a vat registered trader that has got to pay vat once you issue a vat invoice then you can go for vat cash accounting scheme to delay your vat payments. Under this scheme you will only need to pay vat only after your clients have paid against your vat invoice.
Under regular vat accounting, you will need to pay vat in the next vat return irrespective of whether your client has cleared payment of your vat invoice. This is especially true if your business compels you to issue credit invoices most of the time. When this occurs you would end up paying the vat amounts in case your client fails to make any payment at all. Thus, you would find yourself paying vat even on your bad debts.
If you’re a trader in Britain then you may easily shift over to the cash accounting scheme in vat that is made available from HM Revenue and Customs department or hmrc vat department. You’ll however qualify for this scheme http://vatnumbers.com only if your estimated taxable sales within the next year aren’t greater than ?1.35 million. You will also need to exit the scheme as soon as your taxable sales touch ?1.6 million. You could also be able to make use of the cash accounting scheme with other vat schemes like 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 beginning of any vat accounting period. You will however need to separate these invoices from the earlier vat invoices that you would have issued under the standard vat accounting scheme. There are several benefits and drawbacks while choosing the cash accounting scheme. The pros are that when your clients pay you only after a few days, weeks or months then you 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 particular scheme are that you will need to maintain 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 to standard vat accounting then you’ll also need to take into account all pending vat amounts including any money owed. You will also be barred from using vat cash accounting scheme by hmrc if you happen to end up making mistakes in vat calculations, get convicted in a vat offence or get penalized for vat evasion. Once you do leave the scheme then you will have to take into account 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 the cash accounting scheme might be well suited for you. You could avoid paying vat on bad debts and might only have to pay vat whenever your clients pay you. However, you need to check with your vat agent and understand all advantages and disadvantages about the vat cash accounting scheme before you decide to opt for this type of scheme.