Introduction
Under the VAT cash accounting scheme, VAT is based on the date an invoice is paid and not on the date of the invoice. This can make your record keeping easier. However, if you use a proper bookkeeping package such as VT Transaction+ it probably makes it a little more difficult. Depending on your business, VAT cash accounting may delay (or accelerate) the amount of VAT you have to pay to HMRC. If all your supplies and purchases have VAT on them at the standard rate then the amount of the delay will be the excess of the amount your customers owe you over the amount you owe your suppliers, multiplied by the standard VAT rate. If you are already using VT Transaction+ to operate VAT cash accounting and your accounting is complete and correct, the amount of the delay is more precisely given by the balance on the Creditors: VAT - Deferred output account less the balance on the Creditors: VAT - Deferred input account.
You do not need to apply to HMRC to use the scheme or to tell them that you are leaving the scheme.
Activating VAT cash accounting in VT Transaction+
If you are operating the VAT cash accounting scheme, tick the VAT cash accounting box in the VAT dialog (Set Up menu).
When the VAT cash accounting setting is turned on, the VAT on an invoice is initially automatically entered to the relevant deferred VAT account. The deferred VAT accounts are temporary accounts to hold the VAT before it gets transferred to the actual VAT input/output accounts. When the payment is entered and matched against the invoice, the VAT is then automatically transferred to the actual VAT input/output account (which in turn forms the basis for the VAT return). If an invoice is part paid, only a proportion is transferred.
Matching of payment to invoices
VT Transaction+ only knows that an invoice is paid when it is matched against a payment. Therefore, VAT is only transferred from deferred VAT to input/output VAT when the payment is matched to the invoice(s).
Automatic matching when entering supplier payment or customer receipt
Payment of invoices should be made by selecting the invoices in the customer or suppliers account window and clicking on the special PAY, CHQ or REC buttons that appear on the toolbar just above the invoices (as shown in Enter customer and supplier payments (automatically allocated to invoices)).
Entering the payment in this way will automatically generate an entry to transfer the VAT from from deferred VAT to input/output VAT. This entry is included in the double-entry of the payment and is not a separate transaction. For manual matching (see below), a similar transfer occurs, but in a separate transaction called a DVT (Deferred VAT Transfer) transaction.
Manual matching
If the payment of an invoice has already been entered by clicking on the PAY, CHQ, REC (or by importing these transactions) or P+R buttons, the invoice and payment must be manually matched in the customer or suppliers account in order for the VAT return to be correct.
This is done by selecting the invoice and the payment entry in the customer/supplier account window and clicking on the Contra button (¢) on the toolbar just above the entries (as shown in Manually allocate payment to invoices).
If the invoice is part paid, click on the Allocate button (§).
Assuming that the invoice involved has deferred VAT on it, matching off manually will automatically generate a Deferred VAT Transfer (DVT) transaction. This transaction transfers the VAT from deferred VAT to input/output VAT.
Payments on account should be entered by clicking on the black PAY, CHQ or REC buttons at the bottom of the customer/supplier account window. The payment on account dialog has a box for entering the provisional amount of VAT (provided the VAT cash accounting setting is turned on).
Switching schemes
If you switch to or from the VAT cash accounting scheme, you should not change the VAT cash accounting tick box in the VAT dialog (Set Up menu) until you have completed the last return under the old scheme. This is because changing this tick box automatically changes the VAT status of all wholly unpaid invoices already entered.
If you switch to or from the VAT cash accounting scheme, you should check when you next create a VAT return that all invoices that were part paid at the date of the switch are correctly accounted for.
Unticking the cash accounting box has the following effects:
Paid invoices
Switching does not affect invoices that have been paid and matched as they will already have gone through a VAT return before the switch.
If the payment was manually matched to the invoice before switching, a DVT transaction would have been auto-generated (which would have transferred the VAT from deferred VAT to input/output VAT). This DVT transaction remains in the accounts after switching and should be left there.
Unpaid invoices
All unpaid invoices (invoices that have not been matched to payments) will have their VAT transferred from deferred VAT to input/output VAT. This is correct because, under the standard method of VAT accounting, VAT should clearly be declared/recovered immediately, even though the invoices have not yet been paid. This transfer occurs by automatically in the the double-entry of the existing invoice transactions. These transactions will now appear in the return.
Unmatching paid invoices
After switching, unmatching invoices that were manually matched before the switch should be avoided because this has the following effects:
•The DVT transaction that was generated upon the original matching, remains.
•When the invoice is matched to a different payment, a second DVT transaction is generated, which means VAT is double-counted.
•To correct this double-counting, you need to match the second DVT transaction to the original DVT transaction. This will generate a reversal of the original.
•After correcting, there should not be any unmatched DVT transactions remaining in the supplier/customer account.
Deferred VAT accounts
The entries into and out of the deferred VAT output and input accounts are automatically matched off against each other and you should not normally make any of your own entries to these accounts. The balance on these accounts at any point in time should equal the aggregate VAT on the invoices outstanding in the Customer and Suppliers ledgers. There is a special dialog that analyses the entries in these accounts by customer or supplier and compares the sum to the balance in the customer or suppliers ledger. To display this dialog, click on the Display by customer/supplier button at the bottom of the deferred VAT account window.
Transactions excluded from the VAT Cash Accounting Scheme
Certain transactions cannot be accounted for using the cash accounting scheme. These are listed in VAT manual VCAS2200.
These must be accounted for under the standard method of VAT accounting (i.e., the invoice date). To do this while having the VAT Cash Accounting setting on in the software, enter the transaction then make the adjustment shown below.
Note: This adjustment is not required for cash sales1 entered using the REC transaction, or cash purchases2 entered using the PAY transaction.
Exclude transactions from the VAT Cash Accounting Scheme
When the VAT Cash Accounting setting is on, the VAT entry is recorded in the deferred VAT input/output account for customer/supplier transactions. Move this entry to the normal VAT input/output account as follows:
1.Select Display > Defined Account >
•Deferred Output VAT account for transactions with entries to the VAT - Deferred Output account, or
•Deferred Input VAT account for transactions with entries to the VAT - Deferred Input account
2.In the list of entries in the right of the window, click on the entry or entries you want to move, so that they are highlighted in blue. Then right-click and select Move to another account.
To highlight multiple entries, select each entry while holding down the Ctrl key on your keyboard.
To highlight all entries displayed, click on the Select All button:
3.Select the account to move the entry or entries to:
•Creditors: VAT - Output (for entries originally in the VAT - Deferred Output account), or
•Creditors: VAT - Input (for entries originally in the VAT - Deferred Input account)
1. Cash sales are sales paid for at the time of the sale. The term 'cash' is used as the term originated before electronic payments, but nowadays covers all forms of payment.
2. Cash purchases are purchases paid for at the time of the purchase. The term 'cash' is used as the term originated before electronic payments, but nowadays covers all forms of payment.
