VAT on Payment Basis + Cheques

[cppgenius]

What is the correct way of calculating input tax for a vendor registered on the payment basis?

According to the VAT Vendor Guide the following applies:

Payments basis – Add up all the valid tax invoices during the period which have been paid in full and invoices that were partly paid only limited to the extent of payment made. Thereafter apply the tax fraction (that is, 14/114) to this amount to obtain the deductible input tax.

There seems to be different opinions about this, but my logic tells me that when you issue a cheque it serves as a payment, so you include it in your calculation for input tax regardless of whether the cheque has been presented for payment or not. But some people reckon you only include it in your input tax calculation when the cheque is physically through the bank. Which one is the correct way of calculating the input tax?

[CLIVE-TRIANGLE]

It is when payment is made, and not when payment is tendered, which is all that a cheque is. If the return is audited you would have to provide proof of payment in the relevant vat period.

[Dave A]

That made me wonder about cheque receipts. Would the same principle apply - you're only "paid" when you deposit the cheque into your account rather than when you receive the cheque?

[CLIVE-TRIANGLE]

Yes it does. The "payment" basis is a bit of a misnomer; it is actually a "cash" basis.

[cppgenius]

I guess the payment basis has its benefits, but sometimes I think the disadvantages outweighs the benefits by far. Lets say some idiot supplier holds on to your cheque for 3 months and then deposits it, that means you cannot claim the input tax on your purchases, but you have to pay the vat on the sales you made in the mean time, or even worse, you pay the supplier, he deposits the cheque and it takes a week to clear, causing the payment to go through on the first day of the next VAT period. So you are totally at the mercy of third parties and really have no control over when you can claim your input taxes (unless you do everything by cash, credit card or EFT). People will make the lives of us accountants so much easier if they just chucked that cheque book in the trash can and moved over to the 21st century of electronic transactions.

Some people think it is so great to be registered on the payment basis, but it costs you more on the long run with all the reconciliation differences between your VAT return and your accounting records so in short, it is one big pain in the butt.

[dellatjie]

The other side of the argument is the invoice basis.

That is even worse, as you have to pay the VAT over the moment you issue the invoice, not when it is paid. Which means if your debtors don't pay within the standard 30 days, you are paying VAT you have not received yet!

But I have to agree with cppgenius on the cheque-subject: I wish cheques would disappear already, they are just a pain in the butt for accountants all over, and risky to accept as payments.