Accounting for VAT on a cash received basis

By Tracey Glacken, Glacken Accountants
VAT registered traders can opt to account for VAT by using two methods:

(1)    Invoice basis or

(2)    Cash received basis (also known as money received basis or VAT cash accounting)

This article discusses the use of the ‘cash received basis’ and how it works.

If your business has a turnover of less than €1.25 million (with effect from May 2013) then you can opt for this method. Any business with a turnover of greater than €1.25 million must register for the invoice basis.

Also, if you provide the majority of services or goods (at least 90%) to unregistered persons you can opt for the cash received basis.  This applies mainly to retailers, hairdressers, beauticians, restaurants and other similar type businesses.

How it works

Under the cash received basis a trader issues an invoice to a customer in the usual way. When payment is received for this invoice the VAT is accounted for on the traders VAT return. For example, Business X issues an invoice on 12th June 2013 for €1000 plus VAT of €230. On 12th August 2013 Business X receives payment in full for this invoice. Business X will account for VAT in the amount of €230 on their July/August 2013 VAT return.

If a discount or reduction in price is allowed subsequent to the issue of the invoice then the trader must issue a credit note to a VAT registered customer showing VAT. This will have no effect on the liability of the trader as the VAT will be accounted for on the amount received rather than the original invoice. The effect of the credit note is to reduce the VAT deduction allowed to the customer.

How to apply

If you are registering for VAT for the first time you will tick the relevant box on the application form (TR1 or TR2) to indicate your preference.

If you already registered for VAT you will need to contact your local tax office with details of your name, registered number, the percentage of turnover from taxable supplies to unregistered persons and level of annual turnover.

Please note that once this method of accounting for VAT is selected it cannot be changed unless approval from Revenue is granted. The effective date is usually from the start of the period during which it is given.

Transactions between connected persons are excluded from this basis of accounting for VAT and must use the invoice/sales basis.

If your business will exceed the turnover limit of €1.25 million in any continuous period of 12 months then you must contact Revenue to have this authorisation cancelled.

If your business was registered for this method based on the level of supplies to unregistered persons then the authorisation should be cancelled if in any four consecutive months the turnover from taxable supplies to unregistered persons is less that 90% of total turnover.

Further information can be obtained from your local tax office or www.revenue.ie

Tracey Glacken

Owner at Glacken Accountants

Tracey Glacken is owner at Glacken Accountants. Glacken Accountants work with SME’s in the areas of audit, financial statements preparation, personal and company taxation, company secretarial and business planning.

Tracey is a member of the Institute of Certified Public Accountants in Ireland and has worked for over 13 years in practice. Tracey has advised clients in many different sectors from small start-up business to medium sized companies and has extensive experience in statutory audit, financial and management reporting. See www.glackenaccountants.com for more information.

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