VAT cash accounting with related parties

Can you have VAT accruals basis in one related party and cash basis in the other?

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Hi,

I have two linked clients. They are not in the same corporate group, VAT group, etc. But they do share some of the same beneficial owners (and this is why they are different entities; slightly different (though similar) trades but also different ownerships) and so are related parties and are (for one example) associated companies for CT purposes. There are times where they genuinely trade between one another.

One of them meets all the criteria to qualify for the cash accounting basis for VAT.

It happens occasionally that the invoices between them are not settled in a timely manner - the rationale being that 3rd party (for want of a better expression, as I say above this is in many ways a 3rd party too) debtors should be paid first and if cashflow is tight the sister company can wait. Ultimately there are no bad debts between the businesses and the old invoices are always caught up when cash allows. 

But this does create an interesting mismatch for VAT purposes as the accruals based one is recognising the VAT whilst the cash based one isn't. This creates a cashflow timing "bump" in one, not the other (albeit this evens out over a year as invoices are always paid eventually, but in any VAT quarter, it can/does feel funny). 

Is this ok? I cannot find any rules about related parties having different VAT approaches. Clearly if they were a single VAT group it would be different. But since they arent.....?

Replies (3)

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VAT
By Jason Croke
21st Jun 2024 22:47

It's never a good sign when HMRC manuals are redacted within the 'abuse' section https://www.gov.uk/hmrc-internal-manuals/vat-cash-accounting-scheme/vcas...

Generally it is 'acceptable' if not being abused, but HMRC clearly not fans of this and as HMRC aren't prepared to share their true feelings in the manuals, tread carefully.

I've not had issues in the past, but depends on how long the invoices take in getting paid, remember bad debt/claw back rules apply at the 6 month mark, if one entity is struggling or goes under with recharged invoices deliberately not paid by the associated company, if one entity is partially exempt, etc, but as an occasional breathing space then possibly not an issue, but all comes down to the facts, personally not a fan as it just invites attention but equally not had issues where I've seen it happening.

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By The Brick
26th Jun 2024 19:46

Thanks! And great link to HMRC being coy. Sounds like it is ok if genuine, but also a known abuse and so could draw attention even if legitimate. I’ll tread carefully.

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By FactChecker
26th Jun 2024 20:02

It's one of those bellwether scenarios (or a litmus test if you're a chemist) used to determine whether or not you are risk-averse!

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