Pros and Cons of Cash Accounting VAT Scheme

Benefits of cash accounting

Using cash accounting 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 cash accounting scheme.

Disadvantages of cash accounting

Using cash accounting may affect your cash flow in that:

• 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 provide continuous services such as accounting or other professional services.
• 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 cash accounting scheme if your turnover goes over £1.6 million or directed to so by HMRC you will have to account for all outstanding VAT due including any bad debts

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