- Churchill Tax
The Limits of VAT Cash Accounting
The VAT cash accounting scheme is a boon for businesses, especially those whose customers are slow to pay. You must stop using it when your turnover exceeds the scheme limit, but there’s an exception. What is it and when does it apply?
Timing difference
The normal rules say that you must account to HMRC for VAT on your sales in the VAT return period in which you make a supply. This sounds reasonable but chances are you’ll have to pay VAT on sales for which you haven’t been paid by your customer. The solution to this cash-flow problem is the VAT cash accounting scheme (CAS) .
CAS advantages
If you choose to use the CAS you only have to account for VAT on sales for the return period in which you get paid. The same principle applies to reclaiming VAT. That is, you can only reclaim it for the period in which you pay your bills. This means that as long as sales outstrip your purchases the CAS will improve your cash flow. What’s more, it reduces your admin in the event that a debt goes bad because a customer can’t or won’t pay.
Joining and leaving the CAS
You don’t need prior permission from HMRC to use the scheme but you can only do so if you expect your VATable sales in the next twelve months to be less than £1.35 million excluding VAT. You don’t need to leave the scheme until taxable sales at the end of a VAT period have exceeded £1.6 million in the previous twelve months excluding VAT. The leaving threshold is much higher than the joining figure.
TIP:
When calculating your business’s expected VATable sales (standard, zero and lower-rated) for the purpose of checking if you can join the CAS , you can exclude anticipated sales of any capital assets, e.g. the sale of your business premises.
TRAP:
When checking if your business’s turnover has exceeded £1.6 million you must include the value of all VATable sales including those of capital assets. However, you might still be entitled to remain in the CAS.
A second chance
If you exceed the limit because of a one-off increase in sales, e.g. the sale of an asset such as machinery or business premises, you can continue using the CAS if all the following conditions are met:
- The increase has not happened before and is not expected to happen again in the foreseeable future.
- The sale was genuine commercial activity.
- You expect that the value of your VATable sales for the next twelve months will be less than £1.35 million.
Record keeping
The rules don’t require that you notify HMRC where your business turnover exceeded the £1.6 million threshold for the CAS, or seek its permission to continue using it where this was a temporary breach of the limit. However, you are required to keep records, including calculations, showing how you arrived at the decision that you were entitled to remain in the CAS.
Trap. It’s important that you make your records clear and accurate as HMRC can force you to backdate your exit from using the CAS if it believes your decision to continue was wrong.