CASH ACCOUNTING SCHEME - 27.01.2022

Tips for when you leave the cash accounting scheme

Leaving the scheme

You must leave the cash accounting scheme(CAS) if your total sales excluding VAT have exceeded £1.6 million in any twelve-month period up to the end of a VAT period. You will ignore exempt and outside the scope sales. Once you have exceeded the exit threshold, you must leave at the end of the current period and adopt normal VAT accounting rules, i.e. based on accruals accounting.

For detailed commentary on when you must leave the CAS, visit https://www.tips-and-advice.co.uk , Download Zone, year 12, issue 4.

On the VAT return you submit when you leave the scheme, you must declare output tax on your closing debtors but also claim input tax on your closing creditors. If you wish, you can account for output tax on your closing debtors over a six-month period as your customers pay their invoices.

Trap. You must include the value of any asset sales in your exit calculations, e.g. a vehicle sale.

Tip. You don’t need HMRC’s permission to use the six-month transitional arrangement. And you don’t need to contact HMRC to say that you have left the CAS .

Time-to-pay arrangement

If the change to debtor VAT accounting has left your business short of cash, you can ask HMRC for time to pay. It is likely to accept your proposal because there is a clear reason why you have an unexpected cash-flow challenge with your returns. You can propose any repayment period, although it will probably make sense to request three to six months as a maximum period because your debtors should have paid their invoices by then. A time-to-pay arrangement is intended to be short-term only.

Trap. You must agree your time-to-pay deal before your return is due for payment. If you fail to meet this deadline, it will be classed as a late payment and subject to a potential default surcharge.

Revised invoicing date

The CAS gave your business increased working capital equal to the VAT on your closing debtors less the VAT on your closing creditors. When you leave the scheme, this working capital benefit will be permanently lost. You might need to fund the deficit by other means, e.g. asking your bank for an increased overdraft facility.

However, if your sales invoices are paid “x” number of days after you issue them to your customers, a possible solution might be to change your invoice date from the end of the month to the first day of the following month.

Example. John trades as a management consultant and does ongoing work for clients where he invoices periodically. He submits VAT returns on a calendar quarter basis. Following his departure from the CAS, he has decided to invoice his clients on the first day of the next month rather than the end of the previous month. He is therefore delaying his output tax payment by three months on these invoices.

Trap. If, say, John invoices a customer on 1 April 2022 on 30-day payment terms, he must ensure that his customers will pay him on 1 May 2022, rather than 31 May 2022. He will need to check his engagement letter or contract with his clients.