Cash Accounting
Cash Accounting is a scheme suited to businesses who do not want to pay VAT until their clients and customers have paid them for the services or good provided. The Cash Accounting Scheme differs from using the standard VAT accounting method where you do pay VAT on all invoices issued even if they have not been paid.
Some businesses tend to have a higher level of bad debts than others. If this is a problem you face, and your turnover is not more than £1.35 million, you might find it easier to account for VAT using the Cash Accounting Scheme. Using this scheme, you only pay VAT to HMRC when a customer pays you, rather than when you invoice the customer.
The scheme is particularly helpful for your psc, when clients / agencies either take a long time to pay invoices or if they have long payment terms in place for invoices due to be paid by them.
There are advantages of cash accounting to your psc, firstly your psc will benefit from the actual cash flow of the business as you are only required to pay VAT on the invoices outstanding once you have received payment. If your psc does not receive payments from outstanding invoices, bad debt relief is automatically applied as there is no payment due therefore no output tax is due.
When using the Cash Accounting Scheme you will not be able to claim any VAT on goods that you or the business have purchased, until you have actually paid for them. If you pay for most of your goods by credit card then this may be a disadvantage for you, as the goods have not actually been paid for.
When starting your psc, you can start using the Cash Accounting Scheme but please keep in mind that you won’t be able to claim much of your start up cost’s like stock, tools, machinery until the goods have been actually paid for.
Unfortunately, if your psc taxable turnover is above £1.35 million you will not be able to join the scheme. If your psc is not up to date with VAT returns and VAT payments you will not be able to benefit from the scheme. Additionally if you have been convicted of a VAT offence or charged with a fine for VAT evasion in the last year then you cannot join either – it’s not what we say, but what the HMRC stipulate.
You are entitled to stay in the Cash Accounting Scheme until your VAT taxable turnover reaches £1.6 million.
If you want to leave the Cash Accounting Scheme you can do so, however you will need to account for all outstanding VAT that is due which includes any bad debt incurred. Ensure that you speak to your psc expert account manager at the cps group to discuss all of your options.
