Effectively managing cashflow has scarcely been more important to businesses across the UK than in the current COVID-19 pandemic.
It is important to optimise your cashflow position as much as possible and take advantage of VAT reliefs that are available.
In addition to the VAT payment deferral noted at point 1 below, cashflow improvements for VAT are achieved through:
- Delaying and reducing VAT due on sales, and
- Increasing and expediting VAT recovery on purchases.
It is also important to note that generally VAT can be reclaimed going back up to 4 years and therefore the values of lost VAT can often be significant.
We have set out below some key areas where businesses can optimise their VAT position and help cashflow.
1. Delayed VAT payments
HMRC have announced (20 March) that VAT payments will be deferred for 3 months, applying from 20 March to 30 June 2020.
This will cover VAT returns with filing deadlines of 7 April, 7 May and 7 June. You may opt to file your VAT return early to benefit from the deferral, in which case it will also cover an ‘early’ filing of a return that ends 31 May 2020 by 30 June 2020.
The announcement also covers Payments on Account for Large Businesses and those using the Annual Accounting Scheme.
At present, there has been no mention of interest charges on deferred VAT.
No application is required to HMRC. If you have already set up a routine direct debit to pay these liabilities you should cancel these before the return is filed.
More details are expected on the practical implications of this measure.
2. Ensure you and your supplier charge the right rate of VAT
Many businesses often automatically assume VAT is due at 20% on their sales, or that their supplier has correctly determined the VAT liability. This leads to businesses paying too much VAT or charging too much VAT.
Key areas to review now where VAT is often charged at the incorrect rate are:
- Building and construction works
- Property transactions
- Supplies to charities
- International trade
- Business disposals
Take some time to review your VAT position in these areas to potentially free up some cash.
3. Don’t account for VAT too early
The VAT tax points rules determine when VAT is due to HMRC. Many businesses do not appreciate the subtleties of when a VAT tax point is triggered, resulting in VAT being paid early e.g. on issue of requests for payment. For corporate groups, a particular area where business do not optimise tax points is for continuous supplies of management services.
4. VAT Schemes for Small Businesses
The UK has various VAT accounting schemes designed to assist, in particular, smaller businesses to reduce the burden of VAT which can have positive cash flow benefits such as:
- VAT Cash Accounting Scheme – this allows businesses to account for VAT when they have been paid by their customers and when they pay their suppliers rather than when invoices are issued. This is particularly beneficial for businesses which have to provide extended payment terms to their customers and do not have equivalent extended terms from their suppliers. An added benefit is that cash accounting provides automatic VAT relief for bad debts.
- VAT Flat Rate Scheme – this is designed to simplify VAT accounting and allows businesses to apply a fixed flat rate percentage to their gross turnover to arrive at the VAT due. Depending on individual circumstances and the Flat Rate percentage for their business sector, a business may overall pay less VAT to HMRC than under normal VAT accounting.
- VAT Annual Account Scheme – this allows businesses to plan for regular fixed payments to HMRC and can help budgeting.
5. Choose the right VAT return ‘cycle’ / Stagger
Businesses that are in a regular VAT repayment position may benefit from accounting for VAT monthly and as a result will receive VAT repayments more frequently.
For corporate groups, realigning VAT quarters (‘staggers’) for non-VAT grouped companies can mean that Input VAT is recoverable from HMRC by the recipient company before Output VAT is due from the supplier company on intra-group invoices which can provide a positive cash boost.
6. Partial Exemption/ business non-business method
Significant VAT savings can be realised by businesses having an appropriate partial exemption apportionment method in place to recover VAT on mixed use purchases, especially where the Partial Exemption Standard Method (based on turnover) does not accurately reflect the use of purchases in making taxable supplies.
7. Recovering VAT on motoring and staff expenses
Many businesses do not fully recover the VAT they are entitled to on motoring and staff expenses, either through lack of knowledge of available options or incorrectly viewing cost as irrecoverable.
8. VAT Grouping
As VAT is not due on supplies between VAT group members, VAT grouping can improve cashflow by reducing administrative costs.
9. VAT Input Tax accruals
Many businesses perhaps due to stretched accounts payable functions at the moment, may be recovering VAT late where purchase invoices are processed late, and therefore falling into the next VAT return. Utilising a VAT input Tax accrual in certain circumstances can provide a cashflow boost by avoiding invoices unnecessarily falling into later returns.
10. Bad Debt Relief
Subject to meeting certain conditions, businesses that have accounted for VAT to HMRC on their sales which have not been paid by their customer can request a refund of the VAT paid directly from HMRC. Many businesses are not availing themselves of this essential relief or claiming it late and losing out on or unnecessarily delaying VAT refunds.
With the potential for greater bad debts as a result of COVID-19, utilising this relief may be more important than ever.
11. International VAT refunds
Many businesses have incurred VAT internationally and are unaware of the fact that this VAT may be recoverable from the local Tax Authority. Businesses which have incurred overseas VAT and are not submitting refund requests are therefore missing out on VAT recovery. This may be particularly significant if you have organised a conference or attended an exhibition overseas. Claims for EU countries, for the year to 31 December 2019 are required to be submitted 30 September 2020.
How we can help
Our VAT team are here to answer any questions you may have to help you during these unprecedented times.
Please contact us with your queries: