If you’re 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 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 regardless of whether your client has cleared payment of the vat invoice. This is especially true in case your business compels you to issue credit invoices most of the time. When this occurs you would find yourself paying the vat amounts in case your client does not make any payment at all. Thus, you’d end up paying vat even on the bad debts uncategorized.
If you’re a trader in Britain then you could easily shift over to the cash accounting scheme in vat that’s offered by HM Revenue and Customs department or hmrc vat department. You will however qualify for this scheme only when your estimated taxable sales in the next year are not more than ?1.35 million. You will also have to exit the scheme once your taxable sales touch ?1.6 million. You might also be able to make use of the cash accounting scheme with other vat schemes such as the annual accounting scheme.
You can shift over to this scheme even without informing the hmrc vat department provided you are doing so at the beginning of any vat accounting period. You may however have to separate these invoices from the earlier vat invoices that you would have issued under the standard vat accounting scheme. There are many benefits and drawbacks while choosing the cash accounting scheme. The advantages are that when your clients pay out only after a few days, weeks or months then you need to pay vat only after receiving payments from those clients. It’s also possible to remain safe in case any client doesn’t make payments.
The cons to this scheme are that you will need to maintain specific payment records of most of your customers including providing additional evidence in the form of bank statements whenever required by hmrc. You will also be able to reclaim vat on any purchases only once you have paid your supplier. Just in case you opt to shift over to standard vat accounting then you will also need to account for all pending vat amounts including any money owed. Additionally, you will be barred from using vat cash accounting scheme by hmrc if you happen to find yourself making mistakes in vat calculations, get convicted in a vat offence or get penalized for vat evasion. Once you do leave the scheme you will have to account for all pending vat over the following 6 months window cleaning.
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 might be suitable for you. You could possibly avoid paying vat on bad debts and might only need to pay vat when your clients pay out. However, you need to seek advice from 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.
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