Q. I am running my own business and I am registered for VAT and prepare bi-monthly returns based on my invoices. I am currently experiencing some cashflow difficulties due to economic conditions, a friend recommended that I account for VAT on a cash receipts basis. What is this and how does this work?
A. The ‘cash receipts basis’ of recording VAT allows the business to account for VAT when cash is received from their customers rather then when they issue an invoice to a customer. This can improve cashflow as you only become liable to VAT when you receive payment.
You can opt to account for VAT under the cash receipts basis if you satisfy the following conditions: You supply goods and services almost exclusively (at least 90% ) to unregistered persons or persons who are not entitled to claim a deduction for the VAT chargeable to them.
You are a VAT registered person whose annual turnover does not exceed €1,000,000.
VAT on property transactions and on transactions between connected persons are excluded from the cash receipts basis and must continue to be recorded according to the normal invoice basis.
The trader will also still have the same obligations relating to the issue of invoices and maintenance of records as under the invoice basis.
Where a trader accounts for VAT under the cash receipts basis the relevant VAT rate is the one in force when the goods are supplied not the one in force when payments are received.
Where income tax is withheld from a payment e.g. Professional Services Withholding Tax, the trader should still include the income tax withheld as part of the consideration received. If the payment received was €1,000 but €200 had been withheld VAT is paid based on the gross amount of €1,200.
Similarly for credit card transactions any amounts withheld by the credit card company still remain as part of the supplier’s taxable amount and should be included when calculating VAT.
To apply to account for VAT on the cash receipts basis you should apply to your local Revenue district with the following details:
Name and address
VAT registration number
Detail the nature of your business
Provide details of your level of annual turnover
Provide details of the percentage of your turnover for taxable supplies to unregistered persons, for the 12-month period ending on the date of the most recent taxable period before your application.
Provide an estimate of the percentage of turnover generated from taxable supplies to unregistered persons for the 12 months starting in the taxable period in which the application is made.