Invoice basis or cash basis for VAT – what’s the difference?

When it comes to the time to register your business for VAT, whether that be because you’ve hit the threshold or that you are opting to register voluntarily, you need to decide whether it will be on an invoice or cash basis*.

When we (Sage Accounts Solutions Limited) deliver training or are helping you to setup Sage, we have to ask you what VAT scheme you operate. The reason being that there are implications for certain aspects within Sage (tax codes on payments on account, opening balances, how you can correct entries etc) and it’s actually one thing a lot of people are unsure of. 

What are the differences between invoice and cash basis VAT?

Invoice basis – VAT triggered on tax point date (‘standard’ or ‘accrual’ basis scheme)

When opting for the Invoice Accounting for VAT scheme you must take into consideration that this means you must pay any VAT owed to HMRC as you raise your invoices. If you opt to pay your VAT every quarter for example, you would need to pay HMRC the total VAT in which you have invoiced customers for that quarter, regardless of whether or not payment has been received for the invoice from your customers. This can cause issues if you have bad debtors (people who don’t pay on time) because you’re paying out money which you have not yet received. 

Cash basis – VAT triggered on date of cash paid or received

Cash basis VAT accounting means that you only have to pay your VAT once you have been paid by your customer. This option can improve your cash flow as you only pay out once money comes in. If you have customers who pay early or pay before you even issue your invoice this would mean that you would owe HMRC the VAT in the period in which the customer pays you.

* Not everyone is eligible to be able to use the cash basis method for VAT. This method is ideal for smaller businesses whose estimated VATable sales are no more than £1.35 million for the following 12 months. Once you have made the decision to use the cash basis VAT scheme then you are able to remain on the scheme but only until your VATable sales reach the threshold of £1.6 million.

There are also other factors which may implicate your eligibility to join the scheme, such as being behind on your VAT returns, being convicted of VAT related offences or if you have had penalty charges against you for VAT evasion.

There are other VAT schemes available to you, you can find out more by visiting HMRC’s website, here.

If you already use Sage 50, you can find out the VAT scheme you operate by going to Settings > Company Preferences > VAT > VAT Scheme:

If you already use Sage Business Cloud Accounting, you can find out the VAT scheme you operate by going to Settings > Financial Settings > Accounting Dates & VAT > VAT Details > VAT Scheme:

If you’re looking for support for setting up your Sage Software or for some additional Sage training then please get in touch.

17/08/2021

“Any advice relating to accounts or tax should be sought from your tax accountant. Sage Accounts Solutions Limited will not be held responsible for any loss or damage caused as a result of the information contained herein.”

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