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Topic ClosedCash accounting and VAT
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Kevr42 View Drop Down
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Posts: 145 		Direct Link To This Post Topic: Cash accounting and VAT
    Posted: 07 Dec 2007 at 4:00pm
I have just read that from april 2007 HMRC increased the limits for accounting for VAT on a cash basis rather than an accruals basis. The limit you have to be under for registration is now £1.35m (plus VAT) - up from £660k. Deregistration is at £1.6m
 
So, if you are fed up paying over VAT you have not collected yet - or just stating up (although there may be advantages to doing the first quarter on an accruals basis if you owe a lot in the first few months) this is worth a look. There are no formal processes to change over.
 
In my business - which is quite small at 500k ish turnover, cash accounting defers off about 15k of VAT as I am always owed more than I owe.
 
Better in my bank than the Revenue's!
 
 


Edited by Kevr42 - 07 Dec 2007 at 4:20pm
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Kevin Ross FCCA

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DIYAccounting View Drop Down
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Posts: 81 		Direct Link To This Post Posted: 08 Dec 2007 at 12:14am
I dislike the vat cash accounting syetem.
 
It has advantages in that if more business is done by giving clients credit than is received there is a cash flow advantage by defering the sales output vat. But this advantage tends to be a one off cash flow boost in the first quarter or two. After the intial cash flow boost the positive effect of the cash accounting scheme is dependent upon either higher credit sales levels or significant differences in the level of credit sales.
 
This may be advantageous for larger businesses but for smaller businesses there are significant disadvantages such as maintaining vat accounts on a cash accounting basis and maintaining management and tax accounts on an accruals basis.
 
Small businesses are often better off getting the money in faster from customers and concentrating on their time on business rather than increased admin and accounts work. Not a problem for businesses than employ a bookkeeper who can take care of this but most don't.
 
A major cause of particularly small businesses getting into financial difficulties and in severe cases liquidation is inadequate credit control. Increased credit facilities assists business growth but it can also take a business into a major risk area that can be fatal.
 
 
Terry Cartwright,
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Kevr42 View Drop Down
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Posts: 145 		Direct Link To This Post Posted: 09 Dec 2007 at 12:05pm
The advantage may be a one off, quite right, but it can be significant, especially where costs to sales are at a low ratio - or to say it another way margins are good.
 
It also aids businesses who are in a period of profitable growth as during a period of growth working capital can be a problem and paying over increased levels of VAT on debts not yet received can be problematic. As long as you are prudent with the cash you should always be able to pay your VAT bill as you have received the money - not something that you can say on an accruals basis.
 
As I have said in previous threads I use Quickbooks. This has an option for cash or accruals VAT accounting - so there is no additional work in reconciling the VAT returns. I would think actually for the small business simply plotting the transactions that have passed through the bank account (and cash accounts) is actually far easier than an accruals based system. Quickbooks works the two accounting methods seamlessly as I am sure all other good accounting systems would. Check before you buy!
 
In my view small businesses should look at this method of VAT accounting and see if it is right for them. If their accoutning systems do not cope with it - then look to buy a proper package.
 
I would also recommend the flat rate scheme for small businesses that are service companies - there is actually money to be made by applying these schemes - dependant on circumstances.
 
 
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Kevin Ross FCCA

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anthfinegan View Drop Down
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Posts: 3 		Direct Link To This Post Posted: 12 Dec 2007 at 10:44pm
and a proper package can be less than £100 these days..got to be worth it.  Small biz, and no bookkeeper or accounting software that can handle cash basis; how do they know it's worth getting out of bed?
I've had a few testimonials about the flat-rate scheme, next stop HMRC
Anthony Finegan ACMA, MAAT
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Posts: 81 		Direct Link To This Post Posted: 16 Dec 2007 at 11:44am
The flat rate scheme certainly has merits. Very important to check the flat rate applicable to the business with the HMRC website as the flat rate vat applicable does vary according to the business type with the flat rates being set at the average for that type of business.
 
The vat flat rate is particularly suitable for businesses that have a hgher gross margin than the industry average as effectively you are paying vat at the industry average. First year of going for the flat rate scheme also gets a 1% reduction in the rate. Businesses also need to check out the special rules applicable to vat on asset purchases before diving it immediately so they don't lose out on reclaiming some of the vat inputs on assets. Vat inputs can be reclaimed on significant asset purchases in addition to the flat rate scheme.
 
Often best for a new start up business that does spend a little on assets to go with the standard vat scheme for the first year. Then consider changing to a flat rate scheme when the amount of asset purchases reduces and enough numbers on the board to be able to check out if the vat flat rate percentage applicable is going to be the cheapest option.
 
And £100 for an accounting package that can automate the vat returns.
My small business and self employed clients get the full monty for under £15.
 
Terry Cartwright,
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Hawk View Drop Down
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Posts: 1421 		Direct Link To This Post Posted: 16 Dec 2007 at 5:28pm
Originally posted by DIYAccounting

And £100 for an accounting package that can automate the vat returns.My small business and self employed clients get the full monty for under £15


Those wanting an accounts system could try  "Microsoft Office Accounting 2008" It's a 200M  download but it's completely free, has Cash and Accrual reporting, Multi-currency, Jobs and imports exports to/from Excel very comprehensively.
No recommendation except just to have a look.
It's an interesting development that has been anticipated for some time. What do you people think??
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Posts: 781 		Direct Link To This Post Posted: 17 Dec 2007 at 10:35am
Originally posted by Hawk

Originally posted by DIYAccounting

And £100 for an accounting package that can automate the vat returns.My small business and self employed clients get the full monty for under £15


Those wanting an accounts system could try  "Microsoft Office Accounting 2008" It's a 200M  download but it's completely free, has Cash and Accrual reporting, Multi-currency, Jobs and imports exports to/from Excel very comprehensively.
No recommendation except just to have a look.
It's an interesting development that has been anticipated for some time. What do you people think??





 
I thought MS office accounting was only free as a trial, after that it is $200?
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Hawk View Drop Down
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Posts: 1421 		Direct Link To This Post Posted: 17 Dec 2007 at 11:52am
Two versions. "Professional" with stock and other extras is a cost item but "Express"  is free.
http://office.microsoft.com/en-us/accountingexpress/FX101729681033.aspx
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Posts: 81 		Direct Link To This Post Posted: 20 Dec 2007 at 12:12am
I would suggest that the most important feature for many self employed businesses might be a package that produces the self assessemnt tax return and for small limited companies a package that produces a full set of final accounts for submission to companies house and the revenue.
Terry Cartwright,
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Posts: 86 		Direct Link To This Post Posted: 21 Dec 2007 at 8:55pm
Terry

I think that your putting the reporting cart before the business horse.

It is far more important that a business has accounts that can be reviewed on a monthly or even quarterly basis so that any problems can be identified before they arise rather than after the event when the year end accounts are being prepared.  For example, that is far too late to see that you went over the VAT threshold in the third or fourth month of that year's trading and will lead to penalties for late registration.

It is also necessary to comply with S62 of the CA 1985.

And with decent bookkeeping, it is easier (and cheaper for the client) to produce a set of accounts at the year end.

And all of this before we even start talking about disclosures in company accounts or reliefs and restrictions for CT.

No system can be better than the information that is put into it, and that goes for the final report and accounts and the CT return systems probably more than most.

But then, maybe you get referrals from the FRRP.

Kind regards

Murdoch
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anthfinegan View Drop Down
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Posts: 3 		Direct Link To This Post Posted: 27 Dec 2007 at 4:28pm
Originally posted by anthfinegan

and a proper package can be less than £100 these days..got to be worth it.  Small biz, and no bookkeeper or accounting software that can handle cash basis; how do they know it's worth getting out of bed?
I've had a few testimonials about the flat-rate scheme, next stop HMRC
 
of course there are packages out there for less then £100, and I thought I acknowledged them in my initial post?
I will check out the microsoft offering too, thanks.
Do I sense some rivalry in the recent posts?
Cheers to all
Anth
Anthony Finegan ACMA, MAAT
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anthfinegan View Drop Down
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Posts: 3 		Direct Link To This Post Posted: 27 Dec 2007 at 4:30pm
try this link for the UK Microsoft download
Anthony Finegan ACMA, MAAT
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Pay_less_uk_tax View Drop Down
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Posts: 86 		Direct Link To This Post Posted: 27 Dec 2007 at 4:43pm
I thought it was just a bit of gentle leg pulling, seeing as Terry's (and your) Institute is the expert for management accounting.

I've had to sort out the problems caused by more than one person getting it badly wrong and ending up with a tax enquiry, where the cause was ignorance of the rules rather than a deliberate intention to defraud the tax man.

In fact, while training, I came across a client whose administration manager (I'm not an accountant) managed to post some weird and wonderful things, like the credit for depreciation to the bank control account.  "How can it be wrong?  That's what the accounts show!"

On another note, thanks for the MS link.

And a Merry Christmas to all

Murdoch
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