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HMRC internal manual

VAT Cash Accounting Scheme Manual

Cash accounting scheme: Leaving the scheme: Compulsory withdrawal

Exceeding the 25% tolerance threshold

Regulation 60(1) states when a business must stop using the Cash Accounting scheme:

60(1) Without prejudice to regulation 64 below, a person shall withdraw from the scheme immediately at the end of a prescribed accounting period of his if the value of taxable supplies made by him in the period of one year ending at the end of the prescribed accounting period in question has exceeded £1,600,000.

60(3) The requirement in paragraph (1) above shall not apply where the Commissioners allow or direct otherwise.

Regulation 64(1)(c) confirms that businesses which failed to leave the scheme at the correct time had no entitlement to continue to use the scheme.

64(1) A person shall not be entitled to continue to operate the scheme where -

(c) he has failed to leave the scheme as required by regulation 60(1) above

Businesses must monitor turnover regularly so that there will be time to modify the books and records if they become ineligible to continue using the scheme. A business using the scheme will have to leave it as soon as the 25% tolerance (currently £1,600,000) is exceeded in the 12 months then ending.

They must leave the scheme at the end of that tax period in which they exceeded the tolerance and bring to account all outstanding tax, for payments made and received, on that period’s return. VCAS6300 sets out how a business must account for bad debts in such situations. There is discretion to allow continuous use of the scheme where there is a one-off increase in sales.

With effect from 1 April 2004 there are optional arrangements for payment of outstanding VAT for businesses who leave the scheme voluntarily or because they have exceeded the tolerance limit: see VCAS6200 for details.

Fraud and civil evasion penalty cases

If a business is convicted of fraud, enters into a compound settlement agreement, or has had a civil evasion penalty imposed, it becomes ineligible to continue to use the scheme under Regulation 64(1). Regulation 64(2) requires such businesses to account and pay for outstanding tax not yet accounted for under the scheme rules in the period in which they ceased to be entitled to use the scheme.

64(1) A person shall not be entitled to continue to operate the scheme where -

(a) he has, while operating the scheme, been convicted of an offence in connection with VAT or has made a payment to compound such proceedings under section 152 of the Customs and Excise Management Act 1979

(b) he has while operating the scheme been assessed to a penalty under section 60 of the Act

64(2) A person who, by virtue of paragraph (1) above, ceases to be entitled to continue to operate the scheme shall account for and pay on a return made for the prescribed accounting period in which he ceased to be so entitled-

(a) all VAT which he would have been required to pay to the Commissioners during the time when he operated the scheme, if he had not then been operating the scheme, less

(b) all VAT accounted for and paid to the Commissioners in accordance with the scheme, subject to any adjustment for credit for input tax.

If an offending business wishes to use the cash accounting scheme again at a later date, it may not do so for a year, as detailed in VCAS7000 - Regulations 58(1)(c)(i), (ii) and (iii), copied at VCAS2050.

Where appropriate, write to an offending business and advise them when their entitlement to use the scheme ended, and instruct them to bring to account all outstanding VAT.