CAS pitfalls: net payments and barter deals
Payments made and received
You can use the cash accounting scheme (CAS) if your annual taxable sales are less than £1.35 million excluding VAT. Once you have joined, you don’t need to leave until they have exceeded £1.6 million excluding VAT (the latter figure is checked at the end of each VAT period). The main principle of the scheme is that you only account for output tax on a VAT return when your customers pay and only claim input tax when you pay suppliers.
Tip. If you have a large percentage of zero-rated sales, the CAS might not be suitable for your business because the cash-flow advantage of delaying output tax payments on a return will probably be outweighed by the input tax sacrifices, especially if you take a long time to pay your suppliers.
Commission deductions
Suppose that your business makes sales where you receive net payments after a commission has been deducted or some other cost has been paid before you receive your money into your bank account. This outcome will produce VAT errors if you account for output tax based on your bankings figures.
Example. John sells goods through an online platform for £100,000 plus VAT; he pays the platform a commission of £3,000, receiving £117,000 in his bank account. The platform business is based in Ireland. In this situation, John’s VAT accounting should be as follows:
- output tax = £20,000 VAT on sale plus £600 reverse charge for payment to overseas platform business
- input tax = £600 to claim, i.e. input tax with the reverse charge above
- net payment to HMRC = £20,000.
If John only accounts for output tax of £117,000 x 1/6 - based on the net payment he has received - he has made a VAT error, underpaying tax by £500 (£20,000 less £19,500).
Trap. The other risk if you use your bankings figure is that you might also pay 1/6 VAT on non-taxable bank receipts, e.g. bank interest received, capital introduced, rental income, etc.
Barter transactions
If you sell goods or services in exchange for other goods or services (a non-monetary deal) then output tax with the CAS is due on the date when you receive the goods or services from your customer.
Example. If you trade as a computer consultant for a window-cleaning business and issue an invoice for £100 plus VAT on 1 December, the payment for which will be a free window clean of your offices, then the payment date is effectively the date when the cleaner has finished cleaning your windows. So, if this is 3 January, then £20 output tax will be payable on the VAT return that includes this date, probably your March return.
Trap. The window cleaner is unlikely to be VAT registered because they probably trade below the annual £85,000 sales threshold. So, if you exclude this transaction from your records, you will underpay output tax by £20. If they are, you need a VAT invoice for £100 plus VAT.