Under normal VAT accounting rules VAT is accounted for on the basis of invoices issued and received by the business. However, businesses using cash accounting account for VAT on a payment basis. Output tax is accounted for when the business is paid by its customer and the business recovers input tax when it has paid for the goods and services received.
Businesses can only apply to join the cash accounting scheme if their annual turnover does not exceed £1.35m and they are registered for VAT. Permission to use the scheme may be refused if the business does not have a good compliance record (eg returns are not up to date or it has been convicted of a VAT offence in the last 12 months). Cash accounting cannot be used in respect of all transactions (eg in respect of imports or goods supplied under credit sale agreements).
Businesses must leave the scheme if their annual turnover exceeds £1.6m. They are not required to advise HMRC that they are leaving but any input tax or output tax that has not been accounted for will need to be accounted for over a six month period. The six months will not be available and any VAT due will need to be accounted for immediately if the business leaves the scheme because HMRC withdraws permission or the taxable turnover of the business has exceeded £1.6 m and the value of supplies has totalled £1.35m in the last three months.
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