Cash receipts bases for V.A.T – annual turnover limit increasing from 1st May 2014

Under the normal Invoice Basis for accounting, a trader is liable to account for VAT when an invoice is issued to a customer. Under the Cash Basis (also called the Receipts or Moneys Received Basis) of accounting, a trader is liable to account for VAT when payment is actually received.

A trader must fulfill one of two criteria to be on the Cash Basis. Either

• Annual turnover does not exceed €1,25 million (changes to €2 million from 1st May 2014) or
• Supplies are almost exclusively (at least 90%) made to customers who are not registered for VAT, or are not entitled to claim a full deduction of VAT.

In practice, the Cash Basis of accounting is mainly used by shops, restaurants, public houses and similar businesses, and by any other person making supplies of goods or services directly to the public.

It is important to note the following points:

• A person on the Cash Basis is still required to issue a VAT invoice when a customer is registered for VAT;
• The cash basis cannot be used where the trader and the customer are connected parties;
• The cash basis cannot be used for construction services supplied by a sub-contractor to a principal contractor;
• In the event of a change in the rates of VAT, a business operating on the Cash Basis must apply the VAT rate by reference to the time that the goods or services were actually supplied, and not the time that the payment was received (if this is later).

A person or business applying for VAT registration who wishes to use the Cash Basis rather than the Invoice Basis must also apply at the time of registration in writing for permission. Alternatively, application may be made to the local Revenue District subsequently, again in writing, to change from the Invoice Basis to the Cash Basis.

Changing from invoice/sales basis to moneys received basis

Persons may not change from the invoice/sales basis of accounting to the moneys received basis, or vice-versa, without first having received authorisation to do so from their relevant Revenue District.

Where a VAT-registered person already accounting for VAT on the invoice basis obtains permission to change to the moneys received basis, that trader is liable for VAT on any moneys received on and after the approved date of the change. This does not include any payments on which VAT has already been accounted for in respect of goods and services supplied while accounting on the invoice basis.

The main advantage is from a cash flow point of view as under the Cash Receipts Basis the trader is only liable to account for VAT when payment is actually received unlike when operating on a Invoice Basis the trader is liable to account for VAT when an invoice is issued to a customer With the increase in the turnover limit to €2 million from the 1st May 2014, all business should review their turnover to see if they now qualify for the cash receipts basis and thus avail of the cash flow benefits.

Deirdre McDermott is Audit Director. Contact Deirdre McDermott today for more information on audit and accounting services on 01 439 4200.