Managing cash flow is a crucial aspect of running any business, and for marketing and communications agencies, it can be especially challenging due to the delay in receiving client payments. In this blog, we’ll delve deeper into the VAT Cash Accounting Scheme, a valuable tool that can significantly ease the burden on your agency’s cash flow.
What is the VAT Cash Accounting Scheme?
For agency owners who often find themselves paying output VAT (VAT on sales invoices) to HMRC before receiving payments from their clients, the VAT Cash Accounting Scheme can be a game-changer. This scheme essentially allows you to align your VAT payments with your incoming revenue. In simple terms, you only pay VAT to HMRC when your clients have paid you. This can provide much needed cash flow relief, especially when dealing with clients who tend to delay payments.
Eligibility and How to Join
To be eligible for the VAT Cash Accounting Scheme, your agency’s expected annual billings must be under £1.35 million. The great news is that you don’t need to inform HMRC when you decide to move to this scheme. You can simply make the transition at the start of your next VAT quarter. You can stay on the scheme until your annual billings reach £1.6 million, giving you flexibility as your business grows.
Navigating the Transition
While the VAT Cash Accounting Scheme offers substantial benefits, it’s essential to acknowledge that transitioning to this scheme requires some careful consideration. There’s a need for meticulous planning to ensure you don’t inadvertently omit or double up on VAT during the transition. This complexity, coupled with the VAT Cash Accounting Scheme being more difficult to reconcile might be why some accountants hesitate to recommend this scheme to their clients. The best interests of an accountant’s clients should always be the first priority.
Supplier Payments and VAT
Just as you don’t make payments on sales invoice VAT until you’ve received payment from the client, you also cannot claim relief on VAT for your purchases until you’ve paid your suppliers. It’s essential to understand that while the VAT Cash Accounting Scheme can be highly advantageous, it might not be a perfect fit for every agency or consultancy that’s eligible. Each business is unique, and an assessment is necessary to determine whether this scheme aligns with your specific circumstances.
In conclusion, the VAT Cash Accounting Scheme is a useful scheme that can help marketing and communications agencies improve their cash flow by synchronising VAT payments with client receipts. However, it’s not a one-size-fits-all solution. Careful evaluation of your agency’s business and a thoughtful transition plan are crucial steps to ensure a seamless shift to this scheme. Always consult with your accountant to determine if your agency is eligible or the right fit for the VAT Cash Accounting Scheme. By moving to the scheme, you can take control of your cash flow and position your agency for financial success.
Please get in touch to learn more about how we’ve helped agencies transition to the VAT Cash Accounting Scheme and improve their cash flow.