The standard way of accounting for VAT is on a time of supply or tax point basis. You pay VAT on your sales whether or not your customer has paid you.
You can opt to prepare your VAT returns under the Cash Accounting Scheme if your sales are less than £1.35 million (with effect from 1 April 2008) for the year. This VAT scheme can give you significant cash flow advantage if normally you give a period of credit to your customers, as you do not have to account for VAT on sales that are outstanding, unlike the standard VAT scheme. Once you start using VAT cash accounting scheme, you may continue to complete your VAT returns until your taxable turnover reaches £1.6 million.
Under this scheme, VAT is due at the time the cash transaction takes place. This means that you do not need to pay VAT until your customer has paid you. If your customer never pays you, you never have to pay VAT. Similarly, you cannot reclaim VAT on your purchases until you have actually paid your suppliers.
Recording VAT transactions under this scheme is similar to that of a standard VAT scheme. It is a good idea to seek accountant advice should you not sure whether you are recording your VAT transactions in a correct way.
Canterbury Accountancy - Making VAT simple for businesses.
