In April 2024 the cash basis becomes the standard method of calculating taxable profits for unincorporated businesses. Is it worth aligning your VAT accounting with this and what does it entail?
We recently told you about the change in April 2024 to how sole traders and partnerships will work out their profits for income tax purposes. Broadly, it entails calculating profits (or losses) based on income received less expenses paid instead of income earned less expenses payable. To avoid the extra work needed to adjust bookkeeping records to arrive at cash basis profits/losses we expect many businesses to elect out of using the cash basis. However, businesses that don’t use bookkeeping software but, say, use spreadsheets instead, might be happy to adopt cash accounting. To be consistent they might also opt to use the VAT cash accounting scheme (CAS).
What is VAT cash accounting?
The CAS changes the “tax point” for VAT, i.e. when a transaction (sale or purchase) must be accounted for in your VAT returns. Instead of the invoice date, the tax point is the date you’re paid by your customer or you pay a bill.
Tip. An advantage of the CAS is that you don’t have to account to HMRC for VAT on unpaid invoices you’ve issued.
Eligibility
If your business turnover in the previous twelve months was less than £1,350,000 you can sign up for the CAS and remain in it until it exceeds £1,600,000.
Tip. There’s no need to apply to join the CAS, you can just start using it from the beginning of your next VAT quarter.
Trap. Some types of transaction are excluded from the CAS.
Accounting adjustments
When you start using the CAS take care not to account for VAT on supplies made or received in an earlier VAT period, during which VAT was accounted for under the normal rules.
Pros and cons
As mentioned, the main advantage is that you only pay VAT over to HMRC when you’ve been paid by your customers. This means you never have to use other money to fund payment of VAT to HMRC. On the other hand, cash accounting can, depending on the nature of your business, disadvantage you.
Example. Andrew owns and runs a general store. His customers all pay in cash or by credit card. Therefore, he always has money from his sales to cover the VAT he has to pay to HMRC. The CAS would not provide any cash-flow benefit to Andrew. In fact, it would be detrimental as it might delay when he can reclaim VAT on purchases compared with the normal VAT rules.
Tip. Generally, cash accounting isn’t worthwhile for businesses that wholly or mainly make cash sales.
There’s no need to use the VAT cash accounting scheme (CAS) just because you use income tax cash accounting. There can be a cash-flow advantage to the CAS but probably not for businesses which wholly or mainly make cash sales. There’s no sign-up process for the CAS, you can start using it from the start of any VAT return period.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.