HM Revenue & Customs (HMRC) allows you to account for your VAT in two distinct ways.
- Accrual/invoice accounting – You account for VAT from the date you INVOICE your customer, not when they pay you.
- Cash accounting – You account for VAT from the date your customer PAYS you, not the date on your invoice.
Which option works best for you will depend on the nature of your business, and when your customers generally pay you.
Retail businesses that get paid directly at the point of sale:
If you’re a retail business and everyone pays you in cash, at the time of the sale, you should opt for invoice accounting.
You bring in cash revenues and won’t generally have to pay your suppliers for 30 days, so there’s a real benefit to accounting for your VAT from that invoice date and buying yourself some time before that bill has to be paid. For pubs, cafes, shops and high-street retailers this is the option to go for.
Service or manufacturing businesses that get paid on invoice terms:
If you sell your services or products on credit and have to wait 30 days for payment, that can create cash-flow issues if there are late payments or bad debts.
You won’t want to pay VAT on money you haven’t yet received, so your business will be better off opting for cash accounting. For agencies, consultancies or any businesses that get paid to invoice terms, cash accounting is the most beneficial way to account for your VAT.
A point to note: if you’ve opted for the cash invoicing option, there’s an upper threshold of £1.35million turnover. Once you go beyond that threshold, you must move to invoice accounting.
We’ll help you choose the VAT accounting method that works best for your business – just give us a call on 01454 300 999, or drop an email to email@example.com