Simple VAT question: Traditional and Cash Accounting

[ArabianNights]

Hello all,

Simple and quick question - I just want to confirm that this is correct. If a company uses traditional accounting as opposed to cash accounting and also registered for VAT, do you include invoices on VAT returns when using traditional accounting - even if the invoice hasn't been paid in full yet by the customer? I am assuming you still include them, just need confirmation. Thank you!

 

[DWS]

Yes the tax point will be the invoice date, although you could still use the accrual basis for the Company accounts but the cash basis for VAT if you wanted.

 

[MyAccountantOnline]

How is the company acounting for VAT?

Just to add a company cant use the cash basis for accounting purposes and bear in mind not all businesses are permitted to VAT cash accounting.

VAT Cash Accounting Scheme

Cash accounting and VAT - eligibility, thresholds, joining and leaving the scheme

www.gov.uk

 

[ArabianNights]

How is the company acounting for VAT?

Just to add a company cant use the cash basis for accounting purposes and bear in mind not all businesses are permitted to VAT cash accounting.

VAT Cash Accounting Scheme

Cash accounting and VAT - eligibility, thresholds, joining and leaving the scheme

www.gov.uk

Currently using traditional accounting methods - but it just dawned on me that VAT is still being charged on invoices that are being paid at a later late, after the VAT Return period. So VAT has been input into VAT returns as normal, even though traditional accounting is used - it seems that this is correct according to the other response. Thank you!

 

[ArabianNights]

How is the company acounting for VAT?

Just to add a company cant use the cash basis for accounting purposes and bear in mind not all businesses are permitted to VAT cash accounting.

VAT Cash Accounting Scheme

Cash accounting and VAT - eligibility, thresholds, joining and leaving the scheme

www.gov.uk

Can you please elaborate on what you mean by companies not being allowed to use cash accounting? I didnt know that - i thought Cash accounting was the most common methods nowadays. Could be wrong.

 

[ArabianNights]

Yes the tax point will be the invoice date, although you could still use the accrual basis for the Company accounts but the cash basis for VAT if you wanted.

Oh thats interesting! I didn't know that you can use accrual basis for end of year accounts and cash accounting for VAT. Could you also do it the other way round? Use accural for VAT and cash for company accounts? Id assume you could.

 

[DWS]

Ltd Companies are not allowed to use the cash basis for their accounts.

 

[ArabianNights]

Ltd Companies are not allowed to use the cash basis for their accounts.

So they all use traditional accounting? I didnt know that. Anyways, is there a link to any hmrc documentation that states that those using traditional accounting, has the VAT tax point being the invoice date and that these need to be input into the next VAT return? I have been searching high and low online and cannot find anything on the .gov / hmrc website about it. Seems to be information that accountants know of, but isnt published anywhere officially. They all speak of cash accounting.

 

[Argentum Tax]

As @dwc says, unfortunately companies cannot use the cash basis of accounting.

Companies must comply with UK Accounting Standards which are issued by the Financial Reporting Council. An internet search for UK Accounting Standards will give you all of the Standards.

 

[ArabianNights]

As @dwc says, unfortunately companies cannot use the cash basis of accounting.

Companies must comply with UK Accounting Standards which are issued by the Financial Reporting Council. An internet search for UK Accounting Standards will give you all of the Standards.

Thanks for that will search. So I guess that dwc is also correct in that the tax point for VAT will be invoice date, and that these invoices will need to have their input VAT into the next return, and not at the later date, once the invoice has been paid?

 

[Argentum Tax]

So I guess that dwc is also correct in that the tax point for VAT will be invoice date, and that these invoices will need to have their input VAT into the next return, and not at the later date, once the invoice has been paid?

You should read the following HMRC Guide, which you can search on the internet, and in particular Sections 14 and 15.

VAT guide (VAT Notice 700)​

Nothing in VAT, or taxes in general, is so straightforward as one might imagine. There are always “if’s and but’s”. I wouldn’t disagree with what @dwc says, but there are always exceptions which might mean it does not apply In all circumstances.

 

[TheSkyisGray]

If you set up the cash basis for VAT correctly in your software then invoices are only included on a VAT return when paid.

 

[Argentum Tax]

If you set up the cash basis for VAT correctly in your software then invoices are only included on a VAT return when paid.

As already discussed, the ‘cash basis‘ is not open to Companies!

 

[TheSkyisGray]

As already discussed, the ‘cash basis‘ is not open to Companies!

You need to reread DWS’ response at 1.46pm.

 

[Argentum Tax]

You need to reread DWS’ response at 1.46pm.

Yes, sorry, I was conflating the two ‘cash bases’ one for VAT and one for Company accounting.

No need to need to so rude though. Politeness costs nothing!

 

[TheSkyisGray]

Yes, sorry, I was conflating the two ‘cash bases’ one for VAT and one for Company accounting.

No need to need to so rude though. Politeness costs nothing!

I think both my posts were helpful and have put you back on the right track now (added to the other helpful responses) - go back to your software and give it a go. I really don’t think it was rude, I actually tried to include a link to help further but it wouldn’t let me?

 

[Daybooks]

Traditional accounting is the accruals based method that uses the double entry principle. Cash basis means accounting for cash only, which may be on a single or double entry basis. In a single entry set up the reports produced are the Receipts and Payments Account along with a Statement of Assets and Liabilities. Companies and larger charities must by law* produce accounts on the accruals basis. They may also account for VAT on a cash basis if they are eligible (based on turnover).

Therefore if you are accounting for VAT on a cash basis you include the sales and purchase invoices at the time of receipt or payment. If also producing accounts on the accruals basis your VAT control account reconciliation can be a little more complex!

*Companies Act and Charities Act.

 

[ArabianNights]

You should read the following HMRC Guide, which you can search on the internet, and in particular Sections 14 and 15.

VAT guide (VAT Notice 700)​

Nothing in VAT, or taxes in general, is so straightforward as one might imagine. There are always “if’s and but’s”. I wouldn’t disagree with what @dwc says, but there are always exceptions which might mean it does not apply In all circumstances.

Thank you! I’ll have a look at this notice ? I know I’m probably answering a simple question with an obvious answer - but better safe than sorry!

 

[ArabianNights]

Traditional accounting is the accruals based method that uses the double entry principle. Cash basis means accounting for cash only, which may be on a single or double entry basis. In a single entry set up the reports produced are the Receipts and Payments Account along with a Statement of Assets and Liabilities. Companies and larger charities must by law* produce accounts on the accruals basis. They may also account for VAT on a cash basis if they are eligible (based on turnover).

Therefore if you are accounting for VAT on a cash basis you include the sales and purchase invoices at the time of receipt or payment. If also producing accounts on the accruals basis your VAT control account reconciliation can be a little more complex!

*Companies Act and Charities Act.

Thank you ?

 

[MyAccountantOnline]

I appreciate it can cause confusion but it's important to look at VAT separately to how the accounts are prepared.

If you are eligible to use VAT cash accounting it may be beneficial to you. It prevents you paying VAT on sales before they are received and gives you automatic bad debt relief.