VAT registration and how to register was discussed in a previous blog which you can read here.
When you register for VAT you will either be on “Standard Accounting” or “Cash Accounting”.
“Standard Accounting” or sometimes referred to as “Invoice Accounting” is when you have to pay VAT when you raise an invoice. The advantage here is that you also can reclaim input VAT at soon as you receive an invoice form your suppliers even if you haven’t yet paid that supplier.
“Cash Accounting” is when you pay VAT to HMRC on output vat and claim back on input vat at the point in which an invoice is paid.
This could provide your business with a cash low advantage.
John is a bookkeeper. He issues an invoice on the 30th March for £100 + VAT which means £120 sales invoice.
Assuming John’s quarterly VAT deadlines are 31st March, 30th June, 30th September and 31st December.
The client pays John on the 1st April so the invoice falls into the quarter ending 31st March but the payment fall into the quarter ending 30th June.
He would have to pay £20 to HMRC by the 30 April or the 7th May if he file’s and pays online.
But if he was on cash accounting he would only have to pay the £20 by 31st July or the 7th August if he was filing online.
This would give him the advantage of keeping the cash for four months before having to pay HMRC.
Also if say the client doesn’t pay John at all then if john was on “Cash Accounting” he wouldn’t have paid HMRC and no harm was done, however if he was on “Invoice Accounting” then he would have to wait 6 months before he can write off the bad debt even if say the client has gone out of business due to bankruptcy and John knows the client won't pay.
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