My company is registered for VAT on the cash basis.
I have set up the vat details in Solar for Vat is Calculated = "When payments are received".
When entering a new invoice in Solar, it seems that the system creates a vat liability at this point, which to me seems incorrect.
Surely the VAT liability should only be created when I actually receive payment on that invoice?
Hi Steve,
Yes the Company Details & VAT window is not clear enough - the "Calculate VAT when Payment are Received" setting only applies to the way the next VAT return is calculated (ie. in the VAT Return Detail report and the VAT Return Guide window).
Although the tax man allows you to use the cash basis on the VAT return, when it comes to calculating your business profit it's more accurate to use the accrual method. When you raise an invoice you expect to eventually pay the VAT amount to HMRC so you need to mentally 'put aside' that amount into the VAT Liability account. The remaining amount is your income from the sale.
I hope this makes sense - please let me know if you need more information.
Cheers,
