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BUSINESS TIPS

Cash Accounting

Traditional VAT works on a standard accounting basis of accruals.  This means that your accounting (and therefore VAT calculations) are based on the date liability arises.

In most cases, you therefore account for VAT based on the date of an invoice, rather than the date of actual payment.  For most businesses this is a workable situation.  If your client or customer pays for your goods and services immediately or relatively soon after your invoice is issued, you may have no problem paying your VAT on time.

Where this can become a problem is for businesses where customers may pay weeks or even months after an invoice is issued.  It may be necessary for your business to pay VAT to HMRC when you haven’t received payment from your customer.  This can cause cash flow and financing difficulties.

It may be possible for a business such as this to opt to operate their VAT on cash accounting. This means that you operate your accounts on the basis of the date of payment, rather than the date of invoice (i.e. cash paid in or out).

This means that you do not pay VAT to HMRC until your customer pays you for your goods or services supplied. This can be very beneficial for cash flow to a business.

There are however some rules that apply in this area.  Please contact one of our tax advisers for more information.