1. Under the VAT Cash accounting scheme you have to charge VAT to your customers if law requires it. If you’re not sure if law requires you to charge VAT, assume you have to. VAT is presently charged at 20% of the total value of your sales unless it includes items on which VAT doesn’t have to be charged. Appendix 1 to this book deals with the items that don’t need to have VAT charged on them.
2. When your customer pays you they pay for the value of the goods services you have supplied plus the VAT. You can keep the net value of the invoice that was for the goods and services supplied but the VAT element is not yours. This bit you have to pay to HM Customs and Excise.
3. To know when you are due to pay HM Customs and Excise you have to know when they think a payment to you is made. There are four basic ways of being paid that you need to think about:
   • Cash (coins or notes): you receive payment on the date you receive the money.
   • Cheques: you receive payment on the date you receive the cheque or the date on the cheque, whichever is the later. If the cheque is not honoured you do not need to account for the VAT. If you have already accounted for the VAT you can adjust your records accordingly.
   • Bank Giro Credit, standing order or direct: You receive payment on the date your bank account is credited with payment.
   • Credit or debit card: You receive payment on the date you make out a sales voucher for a credit/debit card payment (not when you actually receive payment from the card provider).
4. You can reclaim the VAT that is charged to you by your suppliers (assuming all your sales are standard or zero rate for VAT) but only when you have paid the supplier for the goods or services supplied. Again there are four payment methods that need to be considered:
   • Cash (coins or notes): you make payment on the date you pay the money. But remember – you must have a receipted invoice to claim back VAT on receipted purchases you have paid in this way. The receipt proves you have paid.
   • Cheques: you make payment on the on the date you send the cheque or the date on the cheque, whichever is the later. If your cheque is not honoured, you can not reclaim the VAT. If you have already claimed the VAT you must adjust your records accordingly.
   • Bank Giro Credit, standing order or direct debit: you make payment on the date your bank account is debited with such a payment.
   • Credit or debit card: you pay your supplier on the date a sales voucher is made out for a credit card payment (not when you actually pay the credit card company). This one is quite important to note – a credit card slip is treated the same as if you paid cash, even though you have not actually paid.

What does all this mean?

This means:

– that the dates on which you receive money and

– the date on which you pay out money

Form the basis of your VAT accounting.

This means that:

– the record of money paid into your bank account, and

– the record of money paid out of your bank account

– and the record of cash and credit card expenses you have incurred

are the most important accounts records when you are working on the VAT cash accounting scheme. They are in fact all you need except one additional thing. This is a list of all the sales invoices you have issued. This is needed for the following reasons:

1. Income tax (and for companies, corporation tax) does not work on a cash basis. It works on what is called an accruals basis. This means all issued in the year have been included in your accounts, so this list is essential for that reason.
2. You want to know who you’ve issued invoices to so you can chase them for payment.

So what at the end of the day does this all mean?

Basically it means you have got to keep the following records:

1. Sales book, listing all invoices issued by you.
2. Bank receipts book, recording all money paid into the business bank account.
3. Bank payments book, recording all money paid out of the business bank account.
4. Cash payments book, recording all money paid out in cash by the business. Cash for this purpose includes credit card expenses as they are treated in the same way for the VAT cash accounting scheme. And if you take cash and do not bank it you will also need:
5. Cash receipts book, recording all cash received which has not been banked.

In practice we strongly recommend that if you ever paid in cash that you bank it. This makes life easier for us, the Inland Revenue and HM Customs and excise and so it will be cheaper and easier for you in the long run. Because of this we do not include an example of a cash receipts book in this book.

In the  next section of this guide we look at how each of these books should be prepared.

For further information, please contact us on 03332 401 333 or email enquiries@kirknewsholme.co.uk