Any business in the United Kingdom has to pay VAT to the HMRC after they have reached a threshold of earning £85000. However, the Cash Basis VAT is somehow different from the accrual accounting system. Every business, smaller or established, works on these two accounting systems. Nevertheless, a smaller business has to say goodbye to the cash accounting system after a certain limit. Then they have to move towards the system of accrual accounting. With it, many perks of using cash basis VAT are also eliminated.
In this blog, we will walk you through the cash basis VAT and its advantages and numerous disadvantages. Moreover, we will discuss when you can use cash basis VAT and accrual for your smaller business. So, let’s discuss this informative and exciting discussion!
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What is Cash Basis VAT?
As described above, two types of accounting systems are used to manage cash, invoices and other finances.
- Cash Accounting System
- Accrual Accounting System
A cash accounting system is beneficial for smaller and fledgling business which needs a lot of cash to carry out their purchases and business activities. On the other hand, it helps establishes the reputability and credibility of a starter company.
In this system, the cash is received when the business receives payment from the client and makes a payment to its supplier. So, it becomes easier for the financial manager or accountant to keep track of the VAT returns on all sales.
If you have registered your company voluntarily, you can enjoy many advantages of being a VAT-registered business. After registering for VAT, you can manage your accounting systems for the VAT payment based on two accounting systems.
Here, we will discuss only the cash accounting system for the VAT. Vat calculation becomes simpler and more convenient for smaller businesses and they can make payments accurately during a fiscal year.
Benefits of Cash Basis VAT
Following are the benefits of Vat based on cash accounting systems:
Simple and Accurate Calculation: When you pay your VAT while maintaining your finances through a cash accounting system, you can calculate and manage your VAT conveniently and seamlessly.
Help the Startup Companies: The startup companies are best managed when they work on a cash-based accounting system. Because it provides them with a lot of cash and they can carry out their business activities smoothly. Moreover, if they have higher prospects of growth in the future, the cash accounting system can help them in many ways.
Debt Relief: If you do have not any payments for your business because of due invoices, you do not need to pay VAT to the HMRC.
However, there are some disadvantages as well. For example, if you have not paid your supplier, you cannot reclaim your VAT. Similarly, the investment becomes difficult and you cannot make this investment unless you reclaim VAT on your purchase before the customer is charged for the VAT on a back date.
When Cash Accounting For VAT is the Best?
A new or smaller business can use cash base VAT unless he is sure that his taxable sales would not cross the threshold of £1.35 million. Applicable from 1st April 2007, the cash-based accounting system is useful before the threshold of 1.35 million.
Moreover, the VAT returns are up-to-date and accurate. Moreover, the business has agreed to pay all the VAT returns completely or in instalments. Similarly, the business has not committed any offence for VAT returns.
Once the limit of £1.35 million and your taxable sales are more than this threshold, you are legally required to adopt the accrual accounting system and you no longer can use cash basis VAT. You have to maintain all your payments and receipts in invoices and keep the VAT returns in the accrual accounting system.
On the other hand, any offence committed will lead your business towards the invoice-based accounting system and you can carry your purchases in accruals rather than in cash.
Finally, we can say that cash basis VAT is simpler to use and adapt as you don’t need to track your invoices due to your supplier or from your customers. Instead, you can maintain a record of your activities as and when you receive or make a payment.
The quick payments and receipts make the bookkeeping easier to manage and you can reclaim your VAT straightforward. Moreover, it helps small businesses get enough cash for their businesses to manage their finances.
It also helps startups get out of debt when they have enough cash to manage their business. However, you cannot run and grow your business forever. Once your taxable sales are more than £1.35 million during a year, you automatically move towards the accrual accounting system.
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Disclaimer: All the information provided in this article on What are the Benefits of Calculating VAT on Cash Basis, including all the texts and graphics, is general in nature. It does not intend to disregard any of the professional advice.