VAT cash accounting scheme 2023
The Value-added tax obligations could be a significant burden for businesses, especially those facing difficulties with cash flow or lengthy reimbursement terms with their customers. However, the good part is that the vat cash accounting scheme is available as an alternative to simplify it.
What is a cash accounting scheme?
The cash accounting scheme is one of the accounting schemes launched by HMRC to assist small firms. It is an alternative way of accounting for VAT, which helps small businesses to manage their cash flow. It enables them to account based on cash they received and pay instead of using invoices they received. In other words, eligible businesses pay VAT on sales after receiving money from customers. Therefore, they can reclaim purchases after paying the suppliers.
Under this scheme, businesses that are already suffering with cash flow are benefited in terms of paying VAT on receiving cash. It contradicts typical VAT returns, where the liability is computed from the invoices they issue. In short, when a firm uses VAT cash accounting, it only pays tax on the sales after receiving customer payments. Therefore, businesses reclaim vat on their purchases after paying suppliers.
Eligibility of cash Accounting scheme
You might wonder if you can use the cash accounting plan for your business and want to know the eligibility criteria. Then you must be aware that HMRC has set the following conditions.
- VAT registered
One of the prime conditions to join the scheme is VAT registration. A business must be tax-registered to enjoy the perks of a cash accounting scheme.
- VAT taxable turnover
It is essential to know that all businesses are eligible for a VAT cash accounting scheme whose yearly turnover is less than 1.35 million euros. If they ever exceed this threshold, they can quit the plan voluntarily.
- VAT offense
HMRC has clearly defined that you must not be convicted for a VAT offense in previous years. If you are caught engaging in activities like VAT evasion, then HMRC will cancel your registration for this scheme.
- No previous debt
Businesses should not have any previous debt or VAT evasion. Moreover, it would be best if you were not involved in any charges related to VAT offenses.
How to join the VAT cash accounting scheme?
Unlike other accounting schemes, joining a cash accounting scheme is effortless. You can complete the form VAT 600 and send it to HMRC to become part of this scheme. One can either join online or by post to HMRC.
However, a company must be cautious about accounting for VAT, which has already been dealt with based on invoices.
Advantages and Disadvantages of VAT cash accounting scheme
A cash accounting method has both merits and demerits. Let’s discuss,
Advantages
- Simple to manage
It is one of the simplest accounting methods in which you only keep records of transactions related to cash. Therefore, it helps small businesses that operate mainly on cash.
- Improves cash flow
One of the most significant advantages of using a VAT cash accounting scheme is to improve cash flows. When your business earns below a certain threshold, it is one of the liable options.
Disadvantages
- Limited use
This scheme has a limited scope for businesses with more net payments. Therefore, it does not benefit big firms. It is only suitable for those businesses that have more delayed payments.
- No VAT returns on purchases
One of the most significant drawbacks is that businesses can only reclaim VAT on purchases once they have paid suppliers. Therefore, it is unsuitable for companies that can reclaim more VAT than pay on receiving net payments.
FAQs
Q1. If I quit the VAT cash accounting scheme, can I rejoin it?
You cannot join the scheme for at least twelve months if you leave once. However, if you leave the plan due to outstanding tax, you may rejoin by fulfilling the conditions set by HMRC.
Q2. Is this scheme helpful for your business?
This scheme is helpful for your business if your earning is below a certain threshold of 1.35 million euros. Moreover, cash accounting will be a more viable option if you need help managing cash flows or lengthy payment periods with customers. However, it is unsuitable for your business when you have more net payments because you can not reclaim VAT once you paid to suppliers.