How Can Businesses use VAT to Improve Cash Flow?

Posted by Streets Myton Mulholland Tax Advisory LLP on 29th April 2020 -

Streets Myton Indirect Tax have come up with the following simple remedies, some of which may help a business improve cash flow in these uncertain times.

1.      Accrual Reversal – Input Tax

Where a business operates invoice accounting it might be worth considering the use of an Accrual/reversal system for claiming input tax. Simply put, this allows a business to claim input tax on purchase invoices that have been received but not fully processed through the purchase ledger by the end of the VAT accounting period. A business is entitled to add, or ‘accrue’, this VAT in the current VAT period and then ‘reverse’ the entry in the following period.

2.      Estimation System

During these difficult times when routine daily operations are interrupted, it might be the case that purchase and expense invoices are difficult to obtain or to process through the accounting software. There may be scope to estimate the input tax claimable in any particular period, subject to agreement with HMRC.

3.      VAT Recovery

At a time when businesses have generally seen a decline in activity, it might be an ideal opportunity to review what input tax can be recovered. Previously, where a business has decided not to claim VAT, perhaps because of the additional administrative burden etc, they could be eligible to make a refund claim for this VAT subject to the normal recovery rules. Businesses should take the time to ensure that everything that can be lawfully claimed is actually being claimed and if not, consider submitting a VAT refund claim to HMRC.

4.      Timing of sale invoices

The time of supply rules generally mandate that a sales invoice must be issued within 14 days of the basic tax point. However a business is able to extend this period up to 30 days by requesting an extension from HMRC. Although this could allow for an additional 2 weeks deferral on the tax point, care needs to be taken with physical receipts as these too can create tax points.

5.      Bad Debt Relief

Businesses that have accounted for VAT on supplies to customers, but where customers have not been able to pay, may be able to utilise the VAT Bad Debt Relief. This enables businesses to claim the VAT on bad debts where 6 months has elapsed from the latter of the date of the invoice or the date when the payment was due.

6.      Cash accounting

A business might find that customers are taking longer to pay in the current climate. Some businesses may be eligible to use the Cash Accounting Scheme which can help improve VAT cash flow as you only need to account for output tax when payment is actually received rather than the invoice date.

In order to be eligible for the scheme, a VAT registered business must have an estimated turnover of less than £1.35 million in the next 12 months.

7.      Imports/SIVA

To help businesses during this time, HMRC are allowing the option to defer VAT payments until 31 March 2021. However this does not apply to Import VAT and any business importing goods from outside the EU is still liable to this tax. There are two ways businesses can improve cash flow:

Typically where an importer uses a Freight Forwarders or third parties Duty Deferment Account payment of the VAT and duties would be made prior to or at the time of import. Having a Duty Deferment Account enables importers to defer the payment of Import VAT and Customs Duty until the 15th day of the month following import. Having your own deferment account can provide a business up to 6 weeks improved Import VAT cash flow.

In addition to this, a business can apply for SIVA – Simplified Import VAT Accounting. This scheme allows a business that operates a Duty Deferment Account to reduce the level of financial guarantee required, in some cases to 0%.

8.      Registration

Businesses that currently trade under the VAT registration threshold might benefit from voluntary registration. This could enable them to take advantage of the rules that allow for VAT recovery on some goods and services prior to registration. Typically a business that becomes VAT registered can claim VAT on services up to 6 months prior to registration, and for goods up to 4 years prior to registration (subject to those goods still being on hand). Obviously, this means that a business must account for VAT on sales, so careful consideration needs to be given to this approach.