VAT – Cashflow is King
VAT is often seen as a burden, you are basically an unpaid tax collector on behalf of the government, and therefore governments around the world like it. VAT is also layered in often complex and sometimes illogical rules which adds to the general feeling of negativity towards it.
But those complex rules, once understood, can prove beneficial to a business. There are a variety of opportunities such as flat rate scheme or annual accounting that may benefit some. For most businesses, cash is king, a lack of cashflow can be the difference in survival of a business.
What can businesses do to improve cashflow?
During the current COVID-19 situation, HMRC have allowed VAT to be deferred for returns due in April, May or June, that is covered in our extensive Covid19 section on our website, but in brief it allows a VAT liability to be deferred until March 2021.
But what else can be done?
Easy wins include using cash accounting, you only pay the VAT to HMRC when your customer pays their invoice. This stops the situation where you are paying HMRC before you’ve collected the VAT from the customer. A bonus of cash accounting is that because you don’t pay VAT to HMRC until you get paid, where you have a bad debt, you don’t have to apply bad debt/clawback rules.
What are bad debt rules/clawback?
Where you issue an invoice under normal VAT accounting (accrual), you pay the VAT over to HMRC whether your customer has paid or not. If the customer never pays, you claim that VAT back from HMRC but must wait 6 months from the due.
During these difficult times, many of your customers may go under owing you money, so switching to cash accounting, if possible, means if you do have a bad debt you will not have to wait 6 months to claim the VAT back, you never paid it to HMRC in the first place.
Cash accounting can only be used where your turnover is less than £1.35m, so if your business is over that, then you can’t use it. However, if you sell services, you can instead issue pro-forma invoices with “This is not a VAT invoice” displayed, the VAT is not due until the customer pays, when the customer pays, you then issue a proper invoice which means there is a bit more admin involved (pro forma document then an invoice) but for slow paying customers it can ease your cashflow. You may want to use pro-forma invoices for select customers, whom you think may become a bad debt risk.
Anything else to consider?
You could consider changing your VAT return period/quarters. The benefit is limited but might be useful for businesses which are seasonal, e.g. we have a client that sells food at Glastonbury, for 1 week in June. By making their return period Jun-July-Aug, it means VAT collected during the event from sales of food, are declared on the August quarter return, which has a payment date of 7th October.
Can I just deregister for VAT?
A business may wish to consider deregistration. There are some caveats with that, depends on several things, so don’t just deregister without checking with your Accountant first.
How do you deal with a business that has just gone over the VAT threshold?
A business is required to notify HMRC and register for VAT when its rolling turnover exceeds £85k in any 12-month period, so the test is not based on annual turnover. At the end of each month a business must review its previous 12-month’s turnover (e.g., turnover between May 2019 and May 2020), then at end of June do the calculation again (June 2019 to June 2020), etc.
If a business goes over as a result of a one-off event/exceptional job, the business can write to HMRC and ask for “exception” from registration and give an explanation. HMRC will often accept that request and this delays VAT registration. We have a client who is a musician and all his gigs have been cancelled, he had just gone over the threshold in April, therefore we wrote to HMRC, explained he hasn’t got any income until at least July and so he has not had to register.
That’s a lot to take in?
Yes, we never said VAT was simple, but it can be used to benefit the business in several ways, we’ve only touched the surface in this article. So if you are looking to improve your efficiency in VAT or just wanting to ensure your business is compliant with the myriad of VAT rules (Making Tax Digital, Brexit, etc), then if this article has caught your attention, please contact Jason at Rayner Essex or fill out the form below as we may be able to offer you a free VAT health check to see if we can help further.