Is the VAT scheme right for your business?

Apr 2, 2013 | Uncategorized

Shropshire businesses could benefit from a VAT scheme that helps to ease cash flow, but it’s not right for everyone.

Pam Mason from Dyke Yaxley Chartered Accountants, in Shrewsbury, said the cash accounting scheme was an optional initiative.

“Under the scheme, businesses do not pay the VAT charged on sales to HM Revenue and Customs until they have been paid by the customer.

“And similarly, VAT on purchases and expenses cannot be reclaimed until the supplier has been paid.

“This is a direct contrast to the standard VAT scheme where VAT is paid on invoices issued, even if the customer has yet to pay, and VAT is reclaimed on invoices received, even if the supplier has yet to be paid.”

The cash accounting scheme can be used by businesses who have an estimated taxable turnover for VAT purposes during the next tax year of under £1.35 million.

“VAT taxable turnover covers all standard rated, reduced rated and zero-rated supplies, but excludes the VAT on any supplies and sales exempt from VAT, and sales of capital assets.  And once a business has joined the cash accounting scheme, it can continue in the scheme until its taxable turnover exceeds £1.6 million.”

But Pam warned that businesses who are behind with their VAT returns and payments would not be eligible for the scheme, nor would anyone who had been convicted of a VAT offence or charged a penalty for VAT evasion in the last year.

“There are several advantages to the scheme – it can help with your cash flow as the VAT charged on sales doesn’t have to be paid until your customer has paid the bill.

“And the scheme provides automatic bad debt relief, so if a customer fails to pay, you don’t have to pay the VAT charged on the invoice to HMRC.

“There are some disadvantages though too, and the criteria may mean the scheme is not suitable for your business.

“If your business reclaims more VAT than you pay to HMRC, you will receive the payments later, so it’s unlikely your business would benefit from the initiative.  And you cannot reclaim VAT on purchases and expenses until payment has been made to the supplier, rather than on the invoice.

“So check the small print carefully to see if the scheme could help your business, and seek expert help to ensure your VAT planning is up-to-date.”

Dyke Yaxley’s Pam Mason


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