What are the requirements for cash-based accounting for value added tax?
August 24, 2023 | 50,00 EUR | answered by Emma Wagner
Dear tax advisor,
my name is Verena Nitsche and I have been running a small online trading company for a few years. So far, I have been calculating VAT using the accrual method. However, I have heard that there is also the option of using the cash method and I am wondering if this could be suitable for me.
Currently, my turnover is below 600,000 euros annually and I do not have any VAT-liable intra-Community supplies or services. However, my turnover fluctuates from month to month and I often feel that I have larger expenses than income. This sometimes leads to a cash flow shortage as I have to pay the VAT based on the accrual method even though I have not fully received the money yet.
I am wondering if the cash method would be a better option for me, as I would only have to pay the VAT when I have actually received the money. Additionally, this would allow for better liquidity planning.
Could you please explain to me the requirements for using the cash method for VAT and assess whether this method is suitable for my company? Are there any potential disadvantages or risks that I should be aware of?
Thank you in advance for your assistance.
Best regards,
Verena Nitsche
Dear Mrs. Nitsche,
Thank you for your inquiry regarding the possibility of using the cash-based method for Value Added Tax (VAT) for your online trading company. I would be happy to explain the requirements and discuss the possible advantages and disadvantages of this method.
The cash-based method is an alternative to the accrual method of VAT and allows entrepreneurs to only pay the VAT when they have actually received the money. The requirements for the cash-based method are regulated in § 20 UStG. In general, entrepreneurs whose total turnover did not exceed 600,000 euros in the previous calendar year and who are not expected to exceed 900,000 euros in turnover in the current year can apply the cash-based method.
In your case, since your turnover is less than 600,000 euros annually and you do not have any VAT-liable intra-Community deliveries or services, you could consider using the cash-based method. This method could help you achieve better liquidity planning, as you only have to pay the VAT when you have actually received the money.
However, there are also some disadvantages and risks that you should consider when deciding to use the cash-based method. Firstly, you may need approval from the tax office to use the cash-based method, as this rule does not apply automatically. Additionally, you must ensure that you promptly pay the VAT once you have received the money, or else late payment penalties may apply. Furthermore, by using the cash-based method, you may be at a higher risk of being accused of VAT evasion, as the timing of payment and taxation may not align.
Overall, you should carefully weigh whether the cash-based method is the better option for your company. I recommend contacting your tax advisor or the tax office directly to make an informed decision and minimize potential risks.
I hope this information was helpful to you. If you have any further questions, please feel free to contact me.
Best regards,
Emma Wagner
