Here we cover the workings of cash accounting for VAT. If you are starting or have started a business in Lewisham, Bromley, Kent and London areas we, at Adiva Accountants in Lewisham, can advise you on the annual accounting scheme.
The cash accounting scheme allows a business to account for and pay VAT on the basis of cash received and paid. This is used rather than on the basis of invoices issued and received.
The main advantages of the scheme are as follows:
- Output tax is not due until the business receives payment of its sales invoices. If most of customers pay promptly, the advantage will be limited.
- There is automatic bad debt relief for VAT as if no payment is received, no output tax is due.
- Most small businesses find it easier to work in terms of cash flows in and out of their business, rather than the invoiced amounts.
The potential disadvantages are as follows:
- There is no input tax recovery until the payment of suppliers’ invoices.
- The scheme will not be beneficial for net repayment businesses. If a business has just started up, it usually has substantial initial expenditure on equipment, stocks etc. So, if the input tax exceeds the output tax, you should delay starting to use the scheme. This way, the business recovers the initial input tax on the basis of input invoices as opposed to payments.