The cash receipts basis of accounting for VAT?
The ‘Cash Receipts’ basis means businesses may account for VAT as cash comes in from their customers. It is easier to manage than the normal method, which forces businesses to account for VAT based on invoices issued, regardless of whether or not the money has come in.
Why should I bother applying for the cash receipts basis?
The key advantage to accounting for VAT on a cash receipts basis is the cashflow benefit to your business. The effect of the cash receipts basis is that you only become liable for VAT when you have actually received payment, so you don’t have to fund the VAT on your debtors. This is particularly helpful in a startup situation and in the case of an expanding business.
Who may opt for the cash receipts basis?
Usually a VAT registered business with an annual turnover from vatable supplies which does not exceed €1,000,00 Vatable supplies are sales that are subject to VAT at 21%, 13.5%, 9% or 0%. If you have any sales that are not subject to VAT, e.g. certain services in finance, medicine or dentistry, then turnover from those activities does not have to be included.
My annual turnover is €900,000. Does that mean I can automatically account for VAT on cash receipts?
No, you must apply in writing for authorisation to your local Inspector of Taxes setting out the following details:
Name and address
VAT registration number
Nature of the business activity carried on
Details of turnover (from vatable supplies) for the past 12 months, ending on the last day of the VAT accounting period prior to the application. This means that if you apply in September 2011 the last VAT period before making the application is July / August 2011 So the turnover must be for the 12 months ending 31 August 2011
An estimate of the likely turnover for the next 12 months.
Do I also use cash payments for claiming VAT on my purchases?
No, you continue to claim VAT on purchase invoices, not on the payment of those invoices.
I have already paid VAT on my debtors. Do I have to pay VAT again when I receive the cash from those debtors?
No. Where you have already settled the VAT on an invoice before moving to the cash receipts basis, no further liability arises when the money comes in. However, you are liable for VAT on all other moneys received on or after the approved date of change.
So when can I start using the cash receipts basis?
The Inspector of Taxes will specify an effective date in the authorisation.
Can the cash receipts basis apply to all my sales?
No, there are some transactions where you cannot use the cash receipts basis:
VAT on sales to someone you are connected with (e.g. a relative or where one company controls another) cannot be settled on the cash receipts basis
VAT on property transactions must always be accounted for on the invoice basis.
What exactly is meant by ‘cash’ received?
As well as the obvious, cash for VAT purposes includes:
Any amount credited to your bank account, say by EFT
Money collected by another person on your behalf
Any taxes paid for you by another person
A lot of my sales are credit card. The credit card company usually withholds amounts from the settlement. What figure should I use?
For VAT purposes, you must use the total amount which you actually charged to your customers, not the net amount you receive from the credit card company.
I am caught for withholding tax on my government work fees. Do I account for VAT on the net amount or the gross amount before the withholding tax?
The gross amount unfortunately. You get caught every way.
Some of my money is received through an agent, who deducts fees. What figure should be included in the cash receipts?
Any amount withheld by the agent to cover fees, expenses, etc., must be included in the cash receipts figure. It is the same principle as for credit cards.
How do I treat discounts to my customers?
If your customer is VAT registered and you have already issued an invoice, then you must issue a credit note for the discount or price reduction, showing the VAT element. Tax wise, this does not affect you because you are liable to VAT on cash receipts. The purpose of the credit note is to prevent your customers from claiming back more VAT than they are entitled to.
What happens when my turnover exceeds €1,000,000?
When it is clear that your turnover will exceed €1,000,000 in any continuous period of 12 months, you must let the Inspector of Taxes know. The Inspector will then cancel your cash receipts authorisation. Strictly speaking, the cancellation will have effect from the start of the VAT accounting period during which you are notified of the cancellation, unless the Inspector specifies an alternative date. For example, if the authorisation is cancelled on 15th September 2011, then the VAT regulations say you must use the invoice basis from September/October 2011 VAT period. However, it is our understanding that Revenue deal with this in a pragmatic manner.
My business is seasonal and turnover fluctuates. How will I know when I should apply for cancellation?
The rule is what your annualised turnover must be likely to exceed €1,000,000 on the basis of results for four consecutive calendar months before having to apply for cancellation. For example, if the annualised turnover exceeds €1m based on results for May 2011, then it is not necessary to apply for cancellation. On the other hand if the trend is that your annualised turnover would exceed €1m in May, June, July and August 2011, then strictly speaking, you must apply for cancellation. Again, the Revenue deals with this in a pragmatic manner.
If I don’t apply to have the authorisation cancelled, can I continue to use the cash receipts basis?
No, you do not have a choice. If you don’t notify your local Inspector of Taxes, then the authorisation will be deemed to have been automatically cancelled. You could leave yourself open to interest charges, on the difference between the VAT settled on the cash receipts basis and the VAT which should have been settled on the invoice basis.
Do I have to pay VAT on my debtors at the time the authorisation is cancelled?
Yes. When you change from a cash receipts basis to an invoice basis, liability for VAT at the time of the change must be assessed. The tax due is calculated by apportioning the total amount due to you i.e. your debtors, at the end of the authorised period between the various VAT rates, if more than one rate is applied to your sales.
Is there anything else I should be aware of?
In case of a VAT rate change (ie 13.5% to 9%) sales are liable for VAT at the rate which applied when the goods or services are supplied and not at the rate when the payment is received.