How getting VAT right can help your cashflow
Christopher Scott is an indirect tax senior manager at AAB LLP / Sagars
Businesses are continuing to face uncertainty arising from tensions created by the global political and economic situation, as well as the effects of the pandemic. These issues have the potential to impact significantly on your cashflow. For many businesses, VAT can have one of the biggest impacts on cashflow and we have set out several ways in which differing VAT treatments can help manage your cashflow.
Frequency of VAT returns
The default position for VAT returns is submission on a quarterly basis. But, if you are in a repayment position on a regular basis, i.e. you are claiming VAT back from HMRC on your VAT returns, then we would recommend moving from quarterly returns to monthly returns. This will speed up the repayment of VAT owed to the business.
If you’re business is not already on monthly VAT returns, it is straightforward to change this using your VAT online services account.
The tax point determines the time at which VAT becomes accountable to HMRC. The basic tax point for goods is when they are removed, or otherwise made available. For services, the tax point is when the services are performed.
This basic tax point can be advanced by the receipt of a payment or issue of an invoice before the basic tax point. The issue of an invoice within 14 days after the basic tax point also creates an actual tax point. Consequently, for most supplies of goods and services the scope to delay the tax point is limited.
However, for the continuous supply of services, there is no basic tax point. And a tax point is only created by the issue of an invoice or the receipt of payment. Rather than issue an invoice to customers, the issue of either a pro-forma document or a request for payment, neither of which create a tax point, can delay the tax point until payment has been received.
Importantly, a pro-forma document or request for payment is not evidence of your right to claim input tax. If you have received one of these documents, you must wait until you receive a full VAT invoice or a VAT receipt before claiming the input VAT.
VAT accounting schemes
The standard method of accounting for VAT is ‘accruals’ based, meaning that when you raise an invoice there is a liability to account for the VAT, regardless of whether payment has been made under the terms of the invoice.
For businesses with a taxable turnover below £1.35 million, there are VAT accounting schemes which may assist in managing your cashflow.
Most beneficial is the cash accounting scheme. Under this scheme, VAT is only accounted for on receipt of payment from your customers. The flipside is that you can only recover input tax when you have paid your suppliers. As a result, cash accounting would not be beneficial for repayment businesses. You should model the position for your business to understand whether there would be an advantage.
In addition, the annual accounting scheme may also be useful. Under this scheme, there is only one annual VAT return required. However, payments are required throughout the year based on your previous years VAT liability. A cashflow advantage is mainly gained where the VAT liability for your business is growing year-on-year.
Bad Debt Relief
When your customers are late in paying for your goods and services, where you are not operating under the cash accounting scheme, this has an obvious impact on your cashflow as you will already have declared and paid the VAT due on your returns. Bad Debt Relief (BDR) can help you offset some of this cashflow impact.
Where a debt, on which VAT has been paid to HMRC, has been outstanding for six months, the VAT paid over to HMRC can be recovered. There are certain criteria to be met, the most important being that the VAT must be unpaid at least six months after payment was due. Critically, this may not be the same as when the invoice was issued – if you allow extended payment terms, e.g. 30 days from date of issue, it is six months after the payment terms expire when BDR becomes available.
It is worth reviewing your aged debtors list as a quick way of establishing whether you can claim BDR relief. As with most VAT regulations, it’s a double-edged sword – if you have aged creditors greater than six months old, then you must repay any input tax already claimed to HMRC.
Postponed import VAT Accounting (PVA)
To avoid the significant cashflow issue that would have been created by Brexit, Postponed import VAT Accounting (PVA) was introduced on 01 January, 2021. PVA allows payment of import VAT to be deferred to the next VAT return. Importantly, this extends not only to imports from the EU but also to imports for third countries; offering a significant new cashflow benefit to those importers.
Using PVA is straightforward as there is no application process and no security requirements. You simply instruct your customs agent to use PVA and provide your VAT and Economic Operators Registration and Identification (EORI) number. Statements setting out the amounts due under PVA are available from the Customs Declaration Service (CDS). Where the import VAT is recoverable, the VAT can be reclaimed on the same VAT return on which it is declared.
In all cases, care is needed when managing cashflow using VAT rules as there are anti-avoidance regulations which can apply. If you are unsure, please take advice.