VAT cash accounting scheme is suitable for your business, if your annual sales are below £1,350,000.
Under this scheme, you still issue your VAT sale invoice the normal way except you only pay the VAT to HM Revenue and Customs (HMRC) when you received the money from your customers. This VAT scheme can give you significant cash flow advantage.
VAT cash accounting for customers on credit terms
If you allow credit terms to your customers, you do not have to account for VAT on those sales invoices issued in your VAT returns until you have received the monies from your customers. Correspondingly, If your customer never pays you, you never have to pay the VAT over to HMRC. Similarly, you cannot reclaim VAT on your purchases until you have actually paid your suppliers.
Benefits of cash accounting
The benefit of VAT cash accounting is that you do not have to report your sales in your VAT return until your customers paid you. Thus, this would help with your business cash flow.
Usually, under the standard VAT scheme, you account for the sale as soon as you issued the sale invoice. Let say, your VAT quarter ended is 30 June 2019. You issued the sale invoice of £1200 inclusive of VAT on 28 June 2019. The customer has a 30 days credit term with you. Thus he paid you on 30 July 2019.
For the purpose of VAT accounting, in this case, you would include your sale in the VAT return quarter ended 30 June 2019 and pay the sale tax (or input tax) (current standard VAT rate is 20%) of £200 to HM Revenue and Customs first, before you received the money from your customer.
Your business must leave the cash accounting scheme when your taxable turnover is more than £1.6 million.
There are other VAT schemes available for businesses, VAT Flat Rate Scheme and Annual Accounting Scheme.
Seek accountants advice if you have questions about VAT cash accounting scheme.