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Use VAT to improve cash flow

Cash flow is vital to all businesses – regardless of size.

Most businesses have cost reduction as a vital cornerstone of their business strategy. Businesses that are fully taxable for VAT purposes, i.e. those that generally fully recover VAT on costs, often overlook VAT during cost reduction exercises. However even fully taxable businesses can generate significant P&L and working capital savings if this area is reviewed in detail.

Cost reduction exercises focused on improving cash flows and working capital essentially centre on accelerating the time at which VAT is recovered on costs and delaying the time at which VAT is paid on income. There are a number of ways this can be achieved depending on the nature of the transactions undertaken by the business.

Examples include the following:

  • Making an accrual for input tax (based on actual invoices held). This 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.
  • Input tax estimation – this relies on a provision within the VAT legislation enabling businesses to estimate figures on their VAT return where required. With HMRC’s agreement, it is possible to uplift the input VAT figure by a fixed % each period (reversing next period and replacing it with the current figure).   This provides a one-off injection of cash to the business.  Many large businesses typically recover 25-35% of their input VAT late as a result of workflow processes within the accounting system and queries with supplier invoices.  We can help identify an appropriate % and obtain HMRC agreement on your behalf.

Recent projects include:

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 subsequently 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.

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.

Proforma invoices and requests for payment

Issuing a proforma invoice or a request for payment for services instead of a sales invoice should not create a VAT tax point.  As a consequence no VAT will be due to HMRC until after a payment is received from a customer (at which point an invoice should be issued).

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.

Speak to us

If you are interested in finding out more about the above points or would like to discuss your VAT cash flow position please contact the specialist VAT team at Cowgills, email enquiries@cowgills.co.uk.

Disclaimer

The information was correct at time of publishing but may now be out of date.

Tax
Posted by Carolyn Van Hecke
28th August, 2020
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