Apart from the retail trade and internet traders most of us send an invoice when we provide our goods or services to customers and then wait for the period of credit to expire before we get paid.
During this waiting time we still have our own bills and wages to pay so the working capital we have to accumulate to finance monies owed by customers can be considerable.
And then, of course, there is VAT…
If we sell or provide standard rated supplies and are registered for VAT we have to add 20% VAT to our invoices. The VAT added, in normal circumstances, has to be paid over to HMRC (less any VAT input tax we have been invoiced by suppliers) on a quarterly basis.
Accordingly, it is possible that we have to pay over VAT to HMRC before we receive the equivalent payment from our customers.
Acknowledging this injustice, especially for smaller concerns, HMRC allow registered traders to use their Cash Accounting Scheme (CAS). Simply put, if you qualify to use CAS you only have to pay VAT added to your invoices when your customers pay you. On the flip side, any VAT charged to you by suppliers can only be reclaimed from HMRC when you pay your supplier.
The scheme is only available if your expected taxable supplies in the next year will be £1,350,000 or less. Taxable supplies are defined as the value excluding VAT of standard, lower and zero-rated supplies you make.
There is no formal election required to use CAS but it is well worth crunching the numbers to ensure that you get a positive cash flow impact from doing so!