HMRC updates VAT cash accounting guidance

HMRC has updated its guidance on how the VAT cash accounting scheme works, to provide information on how businesses should account for VAT if they leave the scheme voluntarily, or if their turnover exceeds the ceiling.

The scheme allows businesses to account for VAT on their sales on the basis of payments they receive, rather than on tax invoices they issue.

It can be used by businesses that expect the value of their taxable supplies in the next year will be £1.35m or less, and can be helpful for cash flow because in general businesses do not have to pay VAT to HMRC until customers have paid them. HMRC say this may be beneficial for those businesses that give customers extended credit or suffer a lot of bad debts.

Businesses can only leave the scheme at the end of a tax period. They are required to stop using it if they cannot comply with the record keeping requirements; if the value of their taxable supplies in a year exceeds £1.6m; if HMRC withdraws their use; if they are convicted of a VAT offence or accept an offer to compound proceedings in connection with a VAT offence; or if they are assessed to a penalty for VAT evasion involving dishonest conduct.

In its revised guidance, HMRC says that when a business leaves the scheme there may be supplies that it has made for which it has not been paid and as a result it has not accounted for any VAT.

It advises that the business will need to account for this VAT even if it has not been paid by the customer. There may also be cases where it has not paid suppliers and has not yet claimed input tax. Businesses are entitled to claim this input tax subject to the normal VAT rules and may choose from two options.

One is to account for all the outstanding VAT due in the period in which they stop using the scheme. HMRC warns that while this may be simpler, it but could have a serious effect on cash flow if the amounts of unpaid VAT on supplies the business has made is high.

Alternatively, the business can opt for a further six months in which to account for the outstanding VAT.

It is not possible to take the second option of a further six months if HMRC has withdrawn use of the scheme from the business, or if the value of taxable supplies has exceeded £1.6m and the value of supplies made in the previous three months totalled more than £1.35m.

Businesses do not need to notify HMRC which method they have chosen.

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