The scheme allows you to account for VAT (output tax) on your sales on the basis of payments you receive, rather than on tax invoices you issue. This is different from the normal rules that require you to account for VAT on your sales when you issue a VAT invoice, even if your customer has not paid you.
However, if you choose to use the scheme, you can only reclaim the VAT incurred on your purchases (input tax) once you pay your supplier. Under the normal method of accounting for VAT you can reclaim VAT on purchases you make as soon as you receive a VAT invoice even if you have not paid your supplier.
How the scheme can help your business
The scheme could help your cash flow, because in general you do not have to pay VAT to Customs & Excise until your customer has paid you. The scheme will be especially helpful if you give your customers extended credit or suffer a lot of bad debts.
However, the scheme may not give you any benefit if you:
- are usually paid as soon as you make a sale
- regularly reclaim more VAT than you pay
- make continuous supplies of services
A quick overview
- Pay VAT on the sales when your customer pays you.
- Recover VAT on you purchases when you pay your supplier.
- Eligibility if your turnover is below £1.35 million.
- Join the scheme at the beginning of a VAT period.
- You don’t need to tell IOM Customs & Excise you are using it.
- Detailed information can be found in VAT Notice 731