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
Dependant on your own circumstances, there may be some disadvantages to using cash accounting:
- 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 Cash Accounting Scheme you will have to account for all outstanding VAT due including any bad debts.
Additional record-keeping for the Cash Accounting Scheme
Changing to cash accounting doesn’t mean you can just keep a record of your cash position – you must also keep track of debtors and creditors, so you know the real position with regard to what you owe and are owed. You need this information for Income Tax or Corporation Tax purposes.
In addition to keeping all required VAT records and accounts for standard VAT accounting, you must also use the following procedures for sales and purchases.
If you are paid in cash you must, if asked by your customer, endorse the customer’s copy of your sales invoice with the amount and date paid.
If you settle an invoice using cash, you must keep a copy of the purchase invoice endorsed with the amount and date paid.
Your records must clearly cross-refer payments received or made by you to the corresponding sales or purchase invoices. You must also make sure that you cross-refer these payments and receipts to evidence such as bank statements, cheque stubs and paying-in slips.