Could you use VAT to improve your cash flow?
21st September 2020 Tax CHW Accounting
Cash flow is vital to all businesses – regardless of size. However, they often overlook VAT during cost reduction exercises. But, businesses can generate significant profit and loss and working capital savings if the area of VAT is reviewed.
Cost reduction exercises focused on improving cash flows and working capital basically centre on speeding up the time at which VAT is recovered on costs and delaying the time at which VAT is paid on income and there are a number of ways this can be achieved.
Some examples include:
- Flat rate scheme – smaller businesses can choose to adopt the flat rate scheme and this can result in a VAT benefit. The scheme allows a business to charge standard rate VAT on its sales however it only pays an element of this VAT to HMRC. This can result in a VAT saving. However it should be remembered that under the scheme VAT incurred on expenditure may not be recoverable (with the exception of some capital expenditure).
- Cash accounting scheme – businesses with a turnover below £1.35m can use the cash accounting scheme which results in VAT on sales being declared and paid to HMRC after customers have paid. In this case VAT on expenditure can only be recovered when you have paid your suppliers.
- Making an accrual for input tax, based on actual invoices held enables the business to recover input VAT on costs that have not yet been approved within the accounting system but where the valid VAT invoice is captured within the system. This does not require HMRC approval.
- Invoice timing – VAT incurred on purchase invoices that are received at the end of a VAT quarter can often be recovered (from HMRC) before the VAT shown on the invoice needs to be paid to your supplier. Conversely VAT charged on sales invoices issued at the beginning of a VAT period could be paid by customers before that VAT has to be paid (by you) to HMRC.
- VAT bad debt relief – The VAT declared on unpaid sales that are more than 6 months old, can be recovered from HMRC under bad debt relief procedures. If you later receive a payment from a customer after claiming bad debt relief, you will need to account for VAT from the proceeds. Remember as a customer you will need to repay the VAT incurred and recovered on purchases that are unpaid after 6 months.
- Monthly VAT returns – If your VAT returns normally result in a repayment from HMRC you could improve your cash flow by electing to complete monthly VAT returns. The additional administration costs associated with submitting 12 VAT returns per year instead of 4 should be considered to ensure the change is worthwhile.
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This article is for general guidance only. It provides an outline, and may not include points which are important to your situation. You should not depend on this blog without taking advice based on the full facts of your case. The information given was correct at the time of publication.