26 February 2018

Use VAT to improve cashflow

Cashflow is vital to all businesses - big and small

In most cases the VAT incurred on expenditure can be recovered (in full or part) from HMRC and if this is managed correctly, VAT recoveries can create cashflow advantages.  The following notes highlight a few areas that could create a cashflow advantage.

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 cashflow 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 cashflow position please contact the specialist VAT team at Scott-Moncrieff.

Bookmark and Share