The VAT Cash Accounting Scheme and how it works…

The VAT Cash Accounting Scheme is the usual VAT scheme selected by small businesses due to the cashflow benefits it offers, whereby you don’t have to pay across the VAT to HMRC until your customer has paid the VAT to you.

Who can use the VAT Cash Accounting Scheme?

Your business is eligible to start using the VAT Cash Accounting scheme if you meet the following criteria:

you expect the turnover in the next year will be £1,350,000 or less
you have no VAT returns outstanding
you do not owe HMRC any money or if you do, you have made arrangements with them to clear the total amount of your outstanding VAT payments (including surcharges and penalties)
HMRC has not written to you withdrawing the use of the scheme during the last year
HMRC has not written to you and denied you access to the scheme

VAT turnover estimation

If you estimate that your VAT turnover will not exceed £1,350,000 in the coming year and you are wrong, HMRC will not penalise you for this provided you can show that there were reasonable grounds for your estimate when you started the year using VAT Cash Accounting Scheme.

If your estimate of turnover had no reasonable estimate, HMRC will immediately remove you from the scheme. So, it is sensible to keep a record of how the estimate was made.

What to do if the value of your taxable supplies exceed £1,350,000

Once you have joined the VAT Cash Accounting Scheme you may continue to use it until the annual value of your taxable supplies including the disposal of stock and capital assets, but excluding VAT, reaches £1,600,000.

If this figure is exceeded, you will have to leave the VAT Cash Accounting Scheme at the end of your current tax period and use the normal method of accounting in future.

For example, you must leave the VAT Cash Accounting Scheme on 30 November and begin paying normal VAT accounting from 1 December if your:

– VAT quarter ends on 30 November

– taxable supplies in the 12 months ending 30 November exceeded £1,600,000

There are some exemptions to this rule for one-off sales, so if you are unsure, please speak to your Accountant for guidance.

If you do have to change schemes before you leave the VAT Cash Accounting Scheme, you must bring all outstanding VAT to account.

How to account for VAT if you leave the VAT Cash Accounting Scheme voluntarily or because your turnover has exceeded the ceiling.

When you leave the VAT Cash Accounting Scheme there may be invoices that you have sent for which you have not been paid and as a result, you have not accounted for any VAT. You will need to account for this VAT even if you have not been paid by the customer. There may also be cases where you have not paid your suppliers and you have not yet claimed your input tax. You are entitled to claim this input tax subject to the normal VAT rules. You may choose either to:

account for all your outstanding VAT due in the period in which you stop using the scheme ― this may be simpler but could have a serious effect on your cash flow if the amounts of unpaid VAT on supplies you have made are high
apply for a further 6 months in which to account for the outstanding VAT (HMRC criteria must be met)

How to account for VAT if you use the 6-month option

To avoid double accounting you will need to keep your normal cash accounting records while you used the VAT Cash Accounting Scheme. In particular, you will need to keep a record of payments you make and receive during the 6 months. In addition, you will need to keep separate records required under normal VAT accounting after you left the VAT Cash Accounting Scheme.

If your taxable supplies exceed £1,600,000 because of a ‘one-off’ increase in sales

If you exceed the £1,600,000 limit because of a one-off increase in sales, you may be able to remain on cash accounting on condition that you meet all of the following criteria:

the one-off increase has not happened before and is not expected to happen again, for example, the sale of a capital asset
the sale arose from a genuine commercial activity
there are reasonable grounds for believing that the value of your taxable supplies in the next 12 months will be below £1,350,000

You must keep a record of how you came to your decision to remain on the scheme. If HMRC finds that you do not meet all the conditions then they may exclude you from the scheme immediately, or from the date, your ineligible use began.

If you are unsure, make sure you speak with your Accountant here at Kennedys Accounting Ltd – if you would like to learn more about how we work and how we can assist you not just with your VAT but all of your accounting requirements, please get in touch either via our website www.kennedysaccounting.uk or email us at info@kennedysaccounting.uk or give us a call on 01233 539501, our team will be pleased to assist you.