Andrew Needham looks at how to obtain cashflow savings when paying or charging VAT.
Every three months, a business must pay its VAT return, and when money is tight this can be difficult; but there are ways to improve its cashflow by managing its VAT properly.
There are two basic things a business can do to improve its cash flow when accounting for VAT: delay the payment of output VAT and speed up the reclaiming of input VAT. Sounds simple; but how exactly can this be achieved?
Delay paying output VAT
There are a number of things that a business can do to delay the payment of output VAT quite legally.
If the business’s turnover is under £1,350,000 per annum, it can go onto cash accounting. Using this scheme means a business only needs to account for output VAT after it has been paid.
If a business makes continuous supplies of services (accountants, lawyers etc.) instead of issuing a tax invoice, they can issue a request for payment. This does not create a tax point and they will only need to account for VAT when they are paid. The business will need to issue a full tax invoice when it is paid.
A business only has to account for VAT when a sales invoice is issued, not when it is produced. So if a business produces tax invoices on the last day of its VAT period and does not post them until the next day, it can overstamp them with the correct issue date and delay payment of the VAT by three months.
Under the tax point rules, a business must issue a tax invoice within 14 days of the basic tax point (date of supply). This creates an actual tax point on the date the invoice is issued, so if it spans the end of a VAT period, a business can defer paying the output tax by three months.
If a business imports goods, it should use postponed accounting and avoid actual payment of the VAT completely.
Speed up input VAT repayment
Input tax accruals – the right to claim back input VAT arises when the VAT is charged, this is known as the tax point. The vast majority of businesses post purchase invoices onto their accounting systems only once they have been approved for payment. Therefore, at the end of a VAT period there can be a number of invoices dated within the period but not yet entered into the accounting system and the VAT not claimed.
The business can make a manual accrual of this input VAT without asking HMRC’s permission. The business will need to adjust for the accrual at the end of the VAT period to ensure that the VAT is not claimed twice.
Businesses should remember to make adjustments for bad debt relief for all unpaid debts over six months past the due date for payment.
If a business receives property rental income, it will normally bill it at the end of each calendar quarter. If this is the case, it should make sure that its VAT returns end February, May, August and November, as it will gain two months' use of the VAT before paying to HMRC.
If a business has a number of associated companies and they make supplies to each other, or they have a parent company making management charges, it could review its VAT return staggers to make sure that it can claim back the input VAT in one company before it has to account for the output VAT in the other.
Practical tip
By reviewing its VAT accounting procedures, a business can make significant cashflow savings.
