Whats’ the difference between invoice basis and cash basis for VAT?

When it comes to the time to register your business for VAT, whether this is 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 client training or are helping businesses to setup Sage, we ask what VAT scheme they 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 is something that 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. For example, if you choose to pay your VAT every quarter, you will need to pay HMRC the total VAT that you have invoiced customers for that quarter, regardless of whether the Invoices have been paid or not. This can cause issues if your customers do not pay on time, as you would find yourself 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 received payment from your customer. This option can improve your cash flow as you only pay out when 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.

* You would have to check that you are eligible 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 decided to use the cash basis VAT scheme then you can remain on the scheme until your VATable sales reach the threshold of £1.6 million.

There are also other circumstances which may affect 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.

Or if you’re currently using Sage 50 Accounts software and are looking for extra guidance, why not join The Sage Lady Academy? My membership provides affordable training, support and mentoring on all matters relating to Sage 50 Accounts software, bookkeeping and accounting principles via training, masterclasses, weekly Live Q&A sessions and much more. Find out more about our Sage Lady Academy here:

18.10.22

“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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