Using the Cash Accounting VAT Scheme with easy to use cash accounting spreadsheets can provide many small businesses with significant administrative and cost advantages.
Many practicing accountants recommend the Cash Accounting VAT Scheme. The simple bookkeeping structure and positive cash flow benefits make this an ideal accounting system for many smaller businesses.
Using conventional VAT accounting you will pay VAT on any invoices you have issued, even if you have not received the payment, and you reclaim VAT on any invoices you have received, even if you have not yet paid your supplier.
The Cash Accounting Scheme differs from this. You pay VAT on your sales ONLY when your customers pay you and you reclaim VAT on your purchases ONLY when you have paid your suppliers.
Advantages and disadvantages
The HMRC website has the following to say:
The Advantages - Using this scheme may help your cash flow, especially if your customers are slow payers. You do not need to pay VAT until you have received payment from your customers. So if a customer never pays you, you don't have to pay VAT on that bad debt as long as you continue to use the scheme.
Disadvantages - Depending on your own circumstances, there may be some disadvantages to using the schemem as you cannot reclaim VAT on your purchases until you have paid your suppliers. This can be a disadvantage if you buy most of your goods and services on credit.
If you regularly reclaim more VAT than you pay, you will usually receive your repayment later under cash accounting than under standard VAT accounting, unless you pay for everything at the time of purchase.
If you start using cash accounting when you start trading, you will not be able to reclaim VAT on most start up expenditure, such as initial stock, tools or machinery, until you have actually paid for those items.
If you leave the scheme you will have to account for all outstanding VAT due including any bad debts.
There are some minor additional accounting and compliance requirements as you will still need to keep a record of year end debtors and creditors.
Why choose Cash Accounting
For many small businesses the great advantage of a cash accounting spreadsheet based system is that it is easy to understand. This simplicity encourages attention to detail in the recording of business transactions and this serves to enhance the quality of the accounting records.
There is little mystique in the bookkeeping, you only need record transactions when you either receive or pay for them.
In an earlier article 'Accounting Software - are bookkeeping spreadsheets the answer for small businesses.' I outlined the importance of maintaining accurate and fully reconciled Cash Book records as one of the essential ingredients in maintaining a good spreadsheet based bookkeeping system.
The bookkeeping records needed are exactly the same as those for the Cash Book and can easily be catered for!
Cash accounting can be viewed as an opportunity for some small businesses to take advantage of a simplified bookkeeping system and at the same time improving their cash flow.
Self-Employed accounting spreadsheets – The essential ingredients.
A simple guide for self-employed businesses in the use of accounting spreadsheets.
Accounting Templates for Small Businesses – Right or Wrong?
Is the cost and complexity of accounting software driving many small businesses to using simple accounting templates for their bookkeeping systems?
Accounting Software – are accounting spreadsheets the answer for small businesses?
For many small businesses Simple Accounting Software is hard to find, so could well designed accounting spreadsheets be a valid alternative. Could accounting spreadsheets be a match for proprietary accounting software?
