The VAT Cash Accounting Scheme

If your VAT exclusive turnover is £1.35m or less, then you may account for and pay VAT on the basis of cash paid and received.

You can join this scheme at any time.
 
Once you are in the scheme you can continue to use it until your taxable turnover exceeds £1.6m per annum.  What this means is that you don’t have to pay VAT to Customs on invoices that have not been paid yet and conversely are not allowed to claim VAT back on expenses you have incurred but not yet paid.
 
Example:
John uses the cash accounting scheme as his turnover is below £1.35m per annum.
His major customer is having cash flow difficulties and as a result, he is not paid for his invoices totalling £100,000 until 9 months after the invoice date, at which time he accounts to Customs for the VAT due on these.
If he was not using the cash accounting scheme he would have had to account for VAT on an invoice basis and would therefore have been out of pocket to the tune of £17,500 for a period of up to nine months.
This can be enough to bring some businesses down if they do not have sufficient cash to pay this or bank facilities to fund this.
 

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