Overview of cash accounting scheme

By Tolley
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The following Value Added Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Overview of cash accounting scheme
  • What is cash accounting?
  • Conditions
  • Calculating value of taxable turnover
  • Exceeding the turnover limit
  • Excluded transactions
  • Using other accounting schemes
  • VAT groups
  • Leaving the scheme
  • Transfer of a business as a going concern
  • HMRC withdraws permission or denies access to the scheme

This guidance note provides an overview of the main principles concerning the cash accounting scheme. This note should be read in conjunction with the Operating the cash accounting scheme guidance note.

SI 1995/2518, Regs 56–65; VATA 1994, s 25; VATA 1994, Sch 11, para 2; 2006/112/EC , Article 395; Notice 731 ; De Voil V7.401, (subscription sensitive); VCAS1000
What is cash accounting?

Businesses using the cash accounting scheme are able to account for VAT due on sales when they have been paid by the customer. Businesses using the cash accounting scheme also need to bear in mind that input tax can only be recovered when they have paid the supplier. This differs from the normal rules where businesses use invoices as the basis for paying VAT to and recovering VAT from HMRC.

Using cash accounting can be beneficial to a business in terms of cash flow as it will not be required to pay VAT to HMRC on sales until the customer has actually paid for the goods / services supplied. Using the scheme will be most beneficial for businesses that offer customers extended payment terms or suffer significant bad debts.

See Example 1.

The scheme will not benefit businesses in the following circumstances:

  • if the customers normally pay at the time that the goods / services are supplied (ie retailers, etc)
  • where the business is normally in a VAT repayment situation so VAT is reclaimed from HMRC each quarter
  • where continuous supplies of services are provided

If a business has opted to use the scheme and discovers that it is not beneficial, it can elect to go back to normal VAT accounting, based on invoices issued and received, at the end of a VAT return period.

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