This recent post on the SME Blog talks about the recent changes the UK has made to VAT, in that they are now offering small businesses the ability to account for and remit VAT on a cash basis, rather than accrual:
The VAT cash accounting scheme allows you to account for VAT (output tax) on your sales on the basis of payments you receive, rather than on tax invoices you issue. However, if you choose to use the scheme, you can only reclaim the VAT incurred on your purchases (input tax) once you pay your supplier.
This is good news for businesses with large trade debtors and good news generally for cashflow.
The equivalent value-added tax in Canada, the GST, requires businesses use only the accrual method, which means even if you haven’t collected the tax on sales, you have to remit. That being said, you still get to claim the GST you haven’t yet paid on purchases against those credit sales, minimizing the timing difference impact.
In Canada, small businesses are also able to use the quick method to calculate their remittance, or the simplified method to calculate their GST owed (known as input tax credits).
Both methods simplify the accounting but do not address the cash flow problems in the same way the UK has done with their cash scheme.
So what is better? Helping small businesses save time and money accounting for their tax remittances, or helping small businesses match the timing of their cash inflows and outflows from sales and purchases to tax remittances? I’m inclined to think the latter is more helpful.
My newspaper (yearly budget $30k) did quite nicely with GST, but then again, we had the luxury of being a non-profit which got most of its money from student levies rather than ads, which meant that we consistently got credits. I was irritated to heck when I found out a predecessor screwed up and paid the government their ‘estimate’ of what we owed, when in fact we should’ve received a re-fund. Given the disastrous condition of records, though, it wasn’t worth fighting over once I showed up.
Ouch, that sucks! That really would’ve helped the newspaper out too I’m sure.
Hi Neil
Thanks for the SME Blog mention.
The UK also allows you to use a simplified method as well as the cash accounting scheme. The only real problem I see is SME’s not being aware of the options available to them. That’s really down to their advisors to correct.
No problem Philip, what you’re doing with Goodman Jones and SME Blog is really exciting for an accounting firm. :)
As for the problem of SMEs not knowing their options, I think Krupo’s comment above about his student newspaper outlines that danger perfectly!
Flooding in the file room, though, hurts things even more.
I’m proud to report that the governance I restored is still functioning, a half decade later. :)
As another UK accountant, my take on VAT as it works here is:
The only “simple” thing about the simplified scheme is its name
There are actually a fairly bewildering number of schemes and options in UK VAT, and it’s too simplistic to say that is the adviser’s role: what about all the small businesses which go ahead and do something, and then leave it to their accountant to pick up the pieces?
Having to transfer from cash to accruals accounting can be a difficult exercise (even with professional help) and causes unexpected cash flow difficulty for growing businesses. Like all taxes with bandings and special rules, there’s always a tension in the marginal areas just before and after threshholds.
My personal preference would be for compulsory cash accounting for every business (but don’t know what sort of hit that would involve for the Treasury).
I agree with you on that Adam. The government gets their cut once the cash has been received or paid!