Contact method or invoice method?
When you run a business, it is important to understand how VAT should be reported correctly in order to comply with laws and regulations. In Sweden, there are two common methods for reporting VAT: the cash method and the invoice method . Both methods have their advantages and are important to know in order to choose the right method for your business. Here we go through the differences and give examples of how they work.
The cash method
The cash method means that VAT is recognised when payment is made, i.e. when money actually changes hands. For companies using this method, VAT is recognised when the customer pays the invoice (or when you pay the supplier). It does not matter when the invoice is issued, as long as the payment has not been made.
When can you use the cash method?
This method is mainly available to small companies with an annual turnover of less than SEK 3 million. The company must also be VAT registered and conduct business that is subject to VAT.
Example of the Cash Method:
Let's say your company sells a product for 12,500 SEK including VAT (10,000 SEK excluding VAT and 25% VAT on 2,500 SEK). The customer pays your invoice after 30 days.
- Invoice : The customer receives an invoice for 12,500 SEK (incl. VAT) today.
- Accounting for VAT : Since payment is due in 30 days, you book the VAT (2,500 SEK) at the time of payment – that is, when the money actually arrives in your account.
Invoice method
The invoice method means that VAT is already reported at the time of invoicing, regardless of whether payment is made immediately or at a later time. This means that when you send an invoice to your customer, you report the VAT as if you have already been paid, even if the customer does not pay immediately.
When is the invoice method used?
This method is used by companies with a higher turnover, or if the company has chosen to use it. The invoice method generally applies to larger companies and companies that want more control over when and how VAT is reported.
Example of the Invoice Method:
Suppose the same product sells for 12,500 SEK (including VAT) and you send an invoice to your customer today.
- Invoice : The customer receives an invoice for 12,500 SEK (incl. VAT) today.
- Reporting VAT : Regardless of whether the customer pays the invoice immediately or later, you must report the VAT (2,500 SEK) in the period when the invoice was sent, i.e. when the transaction was registered.
Comparison between the Cash Method and the Invoice Method
| Property | The cash method | Invoice method |
|---|---|---|
| When is VAT reported? | Upon payment (when the money arrives). | When invoicing (when the invoice is sent). |
| Advantage | You only pay VAT when you get paid, which can improve your cash flow. | You report VAT earlier, which can be advantageous if you often get paid quickly. |
| Target group | Small companies with turnover under 3 million SEK. | Companies that want to have control over their accounting and have higher turnover. |
| Claim | Only available to small businesses (turnover under 3 million SEK). | Can be used by companies of any size. |
| Example | You sell a product, but only report VAT when the customer pays after 30 days. | You sell a product and report VAT immediately when the invoice is sent, even if the customer pays later. |
Which method should you choose?
The choice between the cash method and the invoice method depends on several factors, including the size of your business and how quickly you get paid. If you have a small business with low turnover and often pay or get paid quickly, the cash method may be advantageous because you only need to report VAT when the money actually comes in, which can help your cash flow.
On the other hand, if you have a larger business or have a stable clientele with fixed payment times, the invoice method may be better because it provides a more predictable and structured accounting of VAT.
Conclusion
Both the cash method and the invoice method have their advantages, and it's a matter of choosing the method that best suits your business. If you're unsure which method is right for you, it may be a good idea to consult with an accountant or bookkeeper who can help you make the best decision based on your business structure and cash flow.
Summary
| Method | Benefits | Disadvantages |
|---|---|---|
| The cash method | - Better cash flow | - Limited to small companies (turnover under 3 million SEK) |
| - Easy to manage and keep track of | - Can be difficult to handle long payment times and adjustments | |
| - Less risk of errors in VAT reporting | ||
| Invoice method | - Better control and overview of VAT reporting | - Can create cash flow problems if payments are delayed |
| - Possibility to quickly get VAT back | - Increased administrative burden | |
| - Better suited for larger companies and stable payments | - Risk of reporting too much VAT on unpaid invoices |