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VAT-man gifts businesses up to £40k

Date 16 Oct 2007
Author The Editor

The VAT-man is not renowned for his generosity, but a tweaking of the rules is netting North East businesses as much as £40,000. One of the last acts by Chancellor Gordon Brown before taking over as Prime Minister was to significantly raise the threshold for businesses eligible for the Cash Accounting Scheme.

The move meant that a swathe of new businesses were able to account for VAT when they were paid for work, rather than when they invoiced it. The upshot is that any VAT-registered business with a turnover of up to £1.35m can cash in on a one-off boost to the balance sheet.

Neville Baldry, Partner at Darlington-based Clive Owen & Co LLP, said: "Pretty much every business sees the VAT-man as someone to fear, but on this occasion there is cause for celebration as this is one rule from which businesses definitely benefit. It is incredible the amount we are able to save clients who are now eligible for the scheme."

But Mr Baldry is concerned that many businesses are not aware of the recent change in the law.

He said: "Despite this being a significant change in the way VAT is calculated, many firms are missing out because there has been very little publicity about it. Any business operating under the £1.35m threshold should take a long hard look at this - for a lot of businesses there are major cash flow advantages to be had."

The Cash Accounting Scheme has been in operation for many years but the maximum turnover allowed was relatively low. It took a decade before this was raised to £660,000 where it was frozen until the Government's announcement in the April 2006 budget that this would more than double to £1.35m. It took a further year before the plan passed in to law and became available to larger businesses.

Under the scheme, businesses only account for and pay VAT to HM Revenue & Customs when their customers pay their bills. An added bonus is that if a business doesn't get paid by one of its customers, it doesn't have to pay VAT on the bad debt. Equally, scheme users cannot reclaim VAT on purchases until they pay their suppliers.

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