VAT Cash Accounting for Small Businesses:
From 1 April 2013, new tax rules allow small businesses with an annual turnover of between £77,000 to £154,000 to register for VAT cash accounting. Joining the Cash Accounting Scheme (CAS) makes it a lot easier for small businesses to work out the amount of VAT payable on earnings they have received, but what happens when cash accounting for your small business comes to an end?
CAS permits small businesses to improve cash flow by allowing them to defer VAT on invoices that have not been settled including trading expenses, acquisition of plant and machinery and some interest charges together with funds you have received from sales since submitting your self assessment tax return form. On the flip side you can´t claim VAT for goods you have acquired, but have not paid for.
What can you do if you exceed the CAS threshold?
A small business has the option to stay in the scheme until annual turnover exceeds the limit – which for the 2013/2014 tax year is £154,000. At this point you must leave the scheme. The problem for some small businesses is that this will mean you have to pay more in taxes for outstanding invoices that you may not even get paid for.
There are however exceptional circumstances which you can apply to lower the limits and either reduce the amount of income tax payable or re-qualify for the CAS. For example, if you sold equipment that ultimately boosted revenue you would not have ordinarily received you might be able to reclaim VAT within CAS providing you can show the taxman that the following year´s turnover will be less than £154,000.
Before HMRC will let you back into the scheme you must produce thorough records of all sales and purchases for the current tax year and a detailed forecast for the following year demonstrating why turnover will not exceed the following years limit. In most cases HMRC will let you back into the scheme.
However, if you do find that you exceed the CAS limit you may still be able to lower your revenue by taking advantage of HMRC´s deferral rules and delay transition of VAT for a further six months. If the referral brings you back within CAS limits you will avoid paying standard VAT tax.
An additional bonus to playing this trump card is if you have not received payment for any outstanding invoices. In such cases you can treat them as bad debts and defer VAT until they have been paid. It should be noted however that tax deferral rules can only be applied if your turnover in the last VAT quarter before leaving the CAS does not exceed £154,000.
For more advice about CAS, tax referrals and other means of reducing the amount of payable tax for your small business, contact Taxaccolega, a low fixed fee accountant, firstname.lastname@example.org or call us on 08000 235 234 and speak with a member of our friendly and knowledgeable team.