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VAT return calculates returns based on all invoices raised even if they are unpaid?

Question asked by Dave Gibbs 4 years ago


I was wondering if someone could help me, when creating a VAT return it seems that the return raises the VAT on all sales invoices raised in that period, surely this is incorrect as if I was to raise sales invoices with VAT that totalled £1,000,000 in the last week of the Feb - April period (say 28/04/17) but the invoices where not paid until 6 months later (not paid till well over due) I would have to pay £1,000,000 in vat before I have even received a bean on those sales?

Could someone shed some light on this please as I feel I am missing something at the minute?

thank you in advance.

6 Replies

Hi Dave - without seeing your books I can only talk in general terms. I'm also assuming you are on standard VAT and not the Flat Rate Scheme.

Under invoice accounting, when you create an invoice or enter a supplier bill, the VAT element is put to the VAT control account and so at the end of the quarter, the balance on that account will represent the VAT that's shown as payable on the VAT return.

Under cash accounting, when you invoice or bill the VAT is put to the VAT cash control account and sits there until the invoice/bill are paid or part paid, at which time the system automatically transfers the VAT on the payments from the cash control to the VAT control account. So again the balance on that account at the quarter end will represent the VAT per the return and the balance sitting in the cash control will represent the VAT on unpaid invoices less unpaid bills at the quarter end.

So if you've created invoices and bills in your books under invoice accounting but should have used cash accounting then perhaps a short cut way of dealing with the correction is to change to cash accounting and then delete and re-enter any invoices and bills unpaid at the quarter end?

This is only a guess as I've never actually done it and I know from experience of bookkeeping systems that they quite often don't follow the user's logic in dealing with changes.

If any of your income and expenditure has been created from bank or cash transactions then they should remain unchanged as the invoice/cash take place at the same time.

Hi Dave - this was, indeed, the way that VAT worked for all when it was launched in the early 70s. The "Tax point" ie the accounting date for VAT is generally when the goods/services are supplied or, more generally, the date of the invoice and so it is indeed important to make sure customers pay you on time.

Many years later, to help smaller businesses, "cash accounting" was allowed, so you still account in your books for the VAT when the invoice/bill is created but the VAT only hits the VAT return when the invoice/bill is paid.

So, as long as your annual turnover is Organisation >Tax & details >Tax > Manage tax schemes. It sounds as though you selected Invoice accounting so change to cash accounting. You may well need to re-enter transactions though.

Paul, thanks for coming back to me on this one. if I am to change to cash accounting as per the above to cure this problem what impact will this have on my account? what sort of transaction will need to be re-entered? and what other impacts will it have on the account?



Again thank you for your detailed assistance.

I changed over to cash accounting as you have recommended above and it has completely sorted the issue I was having, I am not sure if I was just lucky as I only started reconciling CB 01/01/17 and had only raised a part vat Return for Nov/ Dec/ Jan, I think because in the way of VAT I hadn't previously declared much vat on unpaid invoice (part jan vat Return) it hadn't complicated the process when swapping over.

Thanks again for your time in assisting me.


Just noticed that now on my dashboard I have a yellow notification "you are over the turnover for cash accounting, switch to invoice accounting" will this affect me in any way?

Thanks in advance.

Oh dear - just spotted that the details of small company eligibility to use the cash accounting was cut out my comment above.

Are you really selling over £1.35M pa? You can only join the scheme if you think your turnover will be under this in the next year and, once in, you must leave it once your turnover hits £1.6M.

More details here: https://www.gov.uk/vat-cash-accounting-scheme

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