Cash accounting scheme in VAT: How it Works?
Discover the special VAT scheme of Cash Accounting and how it works in the EU and the UK.
What is cash accounting?
The Cash Accounting Scheme is a special VAT regime that changes the game for how businesses deal with reporting and paying VAT on their bills. Forget about the invoice date; with this scheme, you're all about the date when the cash hits the bank, not when you send out the bill.
Normally, you need to pay VAT to tax authorities according to the invoice date. It is not relevant when (or if) you are paid by your client. For example, in the standard regime, you issue an invoice on March 25 for 100€ + 20€ of VAT. You will need to pay 20€ of VAT to tax authorities in April as part of your Q1 VAT return even if your invoice was not paid by your client. If you are in the cash accounting scheme, you will not include that invoice in your VAT return until it gets effectively paid.
The implementation of this scheme among EU Member States is not harmonized. Therefore, you need to verify if your base country is on board with cash accounting and what specific conditions they set, like annual turnover and such.
As for the UK, the cash accounting regime is available if you meet the eligibility criteria.
How does cash accounting work?
This scheme allows taxpayers to account for VAT on the sales based on the date when payments are actually received, rather than on the tax point date. So, when you actually receive payments, you count your VAT on sales. On the flip side, you also deduct VAT on your purchases when you actually make the payment, not when you get the invoice.
Under the general VAT regime, VAT is paid and reported to the tax authorities for the reporting period in which the invoice falls. For example, for businesses that have a monthly reporting frequency, an invoice issued in October would be reported in November with the VAT already paid and accounted for.
However, with the cash accounting scheme companies do not have to pay VAT until the customer pays the invoice. For example, let's say you sent an invoice in October, and your client takes their sweet time paying it off in December. You won't owe that VAT until December, and you'll report it in your January VAT return.
What is the limit for VAT cash accounting?
Countries that introduced the cash accounting scheme set the taxpayer’s eligibility criteria, i.e., they set the bar for who is eligible, including a turnover limit.
For example, in Poland, the turnover limit is EUR 1.2 million. Austria has a threshold of EUR 110,000 for the past two years. And in Spain, taxpayers who are eligible are those whose sales did not crack EUR 2,000,000.
Now, in the UK, your annual turnover needs to be £1,350,000 or less. Find more details about the UK cash accounting scheme in the HMRC’s notice 731.
Can a limited company use cash accounting for VAT?
Although each country determines the eligibility criteria, the legal form of a company does not normally prevent a company from using the VAT cash accounting system. Your global turnover is what matters when it comes to cash accounting.
What is the difference between cash accounting and standard VAT accounting?
Following the standard VAT rules, it is all about the tax point rules. Usual tax points are when the invoice is issued, when the goods are placed at the disposal of the customer, or when the services are completed. Therefore, under the standard VAT accounting rules, the tax point determines when the transaction must be reported, and when VAT must be paid to the tax authorities.
However, under the cash accounting scheme, the date when the invoice is actually paid determines the moment when the transaction is reported, and when VAT is paid to the tax authorities.
Check the sections for Tax point rules of our VAT Manuals. For example, find here the Spanish tax point rules.
Benefit of the cash accounting scheme
Cash accounting is the superhero of small businesses, swooping in to save the day when cash flow is tight because your client paid late or did not pay at all.
Small businesses that meet the conditions for a cash accounting scheme can see some benefits in their cash flows. For example, under normal VAT reporting, VAT is paid and reported by the business, whether your client paid you or not. Late payments can mess with your cash flow because you are paying before you are getting paid. Cash accounting flips the script - you only pay VAT when your client settles up.
When should I leave VAT cash accounting?
Once you stop meeting your country's eligibility criteria, it's time to break up with cash accounting. You need to check the specific provisions applicable to your case.
For example, in the UK, you must stop using this scheme if you cannot comply with the record-keeping requirements connected to this scheme, you are convicted of a VAT offense, or during the period of one year, your taxable supplies exceed the £1,600,000 amount.
Have a look at our UK VAT manual.