Value Added Tax (VAT), under the cash basis accounting method, is computed and remitted only when payment for goods or services is received. This contrasts with the accrual method, where VAT is accounted for when the invoice is issued, regardless of when payment is collected. For example, if a business provides a service in January but doesn’t receive payment until March, the VAT is accounted for and paid in March.
This method offers significant cash flow advantages for businesses, particularly small and medium-sized enterprises (SMEs). Deferring the VAT payment until receipt of payment reduces the burden of fronting VAT on sales where payment is delayed. Historically, this approach was introduced to alleviate financial strain on smaller businesses that might struggle with immediate VAT obligations on invoices issued but not yet settled.
