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Change VAT schemes in QuickBooks Online

SOLVEDby QuickBooks53Updated 2 weeks ago

Learn how to change your accounting method from cash to accrual (or vice versa) in QuickBooks Online. We'll also explain what happens when you switch accounting schemes and how it affects your reports.

Which accounting method should I use?

Each method has its own pros and cons. It's important to understand how they work so you can choose the best bookkeeping practice for your business.

Learn more about the difference between Cash and Accrual methods.

Because each accounting scheme reports on your income and expenses differently, your accounts and balances may show up differently in your reports once you switch schemes.

If you're unsure which method to use, talk to your accountant. Or, find an Accountant if you need one.

ImportantAccording to HMRC's guidelines, it's recommended that you switch accounting schemes at either the beginning or end of the VAT period. QuickBooks currently doesn't support switching accounting schemes during a VAT period.

Open transaction adjustments

The Open transaction column will show on your VAT return when you change accounting schemes.

Open transactions is an automatic adjustment feature that reassesses the VAT due up to the open period based on the accounting scheme you use. The adjustment helps make sure that you don't pay or reclaim VAT on any transaction more than once.

The open transactions figure is the difference between what has been paid on the old accounting method and what would have been paid on the new method, between the effective start date for new scheme and the end of the last filed period.

By default the effective start date for new scheme is set to 12 months before the end date of the last filed period.
To verify the amounts the customer can run the VAT 100 report between those 2 dates on the old and new methods, then deduct the old amount for each box from the new amount for each box.

There is no single report to see a detail breakdown of the open transactions figures, this would need to be done manually by comparing the VAT detail report on the old and new methods. Any transaction that appears on both reports can be disregarded, a transaction that is on the old method and not the new is a negative open balance and one on the new method and not the old is a positive open balance.

How to change VAT accounting schemes?

  1. Go to Taxes and select VAT (Take me there).
  2. Select Edit VAT and then Edit settings.
  3. Under VAT accounting scheme, choose the VAT accounting scheme you wish to use.
    • Cash - choose this scheme if you will track and pay VAT once you've been paid by the customer.
    • Standard VAT - also known as accrual, choose this if you will track and pay VAT on the invoice due date.

If you're preparing for your first VAT return in QuickBooks – congratulations! – and you're happy with the changes, select Save.

If you have previous VAT submissions in QuickBooks, you'll see the Effective date for new scheme field. This is the date provided by HMRC.

When is the effective date for the new scheme?

QuickBooks will automatically track the changes between the accounting schemes and show them under the Open Items column on your next VAT return. 

By default, the effective start date will be a year from your last return’s end date. The transactions included in your next VAT return will depend on the date you choose to start the new scheme.

Note: You may need to change the effective start date to include older transactions that fall out of this date.

When you use the accrual scheme in reports:

  • Your report counts income and expenses as if they happened when you sent the invoice or got the bill
  • It includes income and expenses even if the money hasn’t changed hands yet

Switching from the accrual method to cash basis may reduce the amount of VAT due on a transaction. This is because the open transactions feature is disregarding any transactions that have not been paid yet.

Once these transactions are paid, an open transaction will automatically adjust the VAT on the payment so you don't pay or reclaim VAT more than twice.

Note: If you have an unpaid bill or transaction that you already claimed VAT on, open transactions will still reduce the VAT amount on the transaction but this will be cancelled once the payment is made.

When you use the cash method in reports:

  • Your report counts income or expenses as though they happened when you got the payment or paid the bill
  • If you sent an invoice or got a bill but the money hasn’t changed hands yet, your report doesn’t include it in your income or expenses

Switching from the cash basis to accrual may increase the amount of VAT due on a transaction. This is because the open transactions feature is looking at all the transactions, paid or unpaid, entered in QuickBooks.

All transactions entered in QuickBooks, including bills from suppliers, will now have VAT.

Note: Only the totals are submitted to HMRC.

If you're on the FRS, or have switched over to the scheme halfway through the financial year, you can turn this on in QuickBooks. To do so:

  1. Go to Taxes and select VAT (Take me there).
  2. Select Edit VAT and then Edit settings.
  3. Tick the box that says Flat Rate Scheme (FRS). This will show more options.
  4. Enter your Flat Rate percentage. HMRC will provide this to you when you switch schemes.
  5. Save.

Note: FRS supports both cash and accrual accounting methods.

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