In the UK, HMRC offers a number of different schemes to businesses to account for and pay their V.A.T. liabilities. The two main schemes are Invoice (or Standard) Accounting and Cash Accounting. Other schemes are essentially variants of one of these two.
Using Invoice Accounting you pay V.A.T. on your sales whether or not your customers have paid you. You also recover V.A.T. on your purchases whether or not you have paid your suppliers.
Using Cash Accounting you pay V.A.T. on your sales only when your customers have paid you. You also recover V.A.T. on your purchases only when you have paid your suppliers.
With Cash Accounting you only have to pay your V.A.T. liability when you have received the money from your customers with which to cover the V.A.T. payment less the V.A.T. element on payments to your suppliers. This can help your business cash flow, especially if you offer good credit terms to your customers.
With Cash Accounting you have automatic bad debt protection on the V.A.T. element of your customer debts. If a customer doesn’t pay you and you have to issue a credit note or write off the debt, with Invoice Accounting you will have already paid the V.A.T. on that customer debt and will only get it back via the credit note in your next V.A.T. return. With Cash Accounting, you won’t have paid the V.A.T. liability as the customer will not have paid you.
Which scheme should you use?
Because of the difference described above, it is nearly always beneficial to use the Cash Accounting scheme if your business is permitted to do so. There are restrictions on which businesses are permitted to use the Cash Accounting scheme for V.A.T. Click on the link below to be taken to the HMRC web site for more details. You should consult your bookkeeper or accountant if you have any doubt.
Configure your system for your chosen scheme
Once you have chosen the scheme that is appropriate for your business, it couldn’t be easier to effect this in your product –
- See V.A.T. Rates & Default V.A.T. Codes for how to do this.