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Coronavirus cash flow tips to help your working capital

Delaying invoices

Unless your business uses the cash accounting scheme, you will usually account for output tax on a VAT return based on the date of your sales invoices. But there is scope to delay issuing sales invoices by raising alternative documents in some cases.

Example. John the builder is working on a large contract for a customer and raises a sales invoice at the end of each calendar month, based on the measured work he has carried out. The customer pays him 14 days later. John should consider raising an “application for payment” at the end of the month, with a note that an invoice will be raised when payment has been made 14 days later. This means that John will not account for output tax on work carried out for the third month of each VAT quarter until the following period.

Tip. It would be sensible to agree this approach with your customer before work starts on a project, e.g. in your contract or letter of engagement.

Continuous supplies

If you provide services on an ongoing basis, e.g. computer software support services, then a tax point is created when you receive payment or raise an invoice, whichever happens sooner. So, you could raise a “fee note” or “request for payment” at periodic intervals, only raising the invoice when you later receive payment.

Tip. It is worthwhile including a sentence on the fee note along the lines of “This is not a VAT invoice for input tax purposes” so that your customer does not incorrectly claim input tax.

14-day rule

If you supply goods to a customer, or a service that’s been completed, you have 14 days to raise a sales invoice. Otherwise the date when the work was completed or goods were supplied becomes the relevant date for output tax purposes, i.e. the return you have to account for the VAT on.

Example. Tom sold a computer to Tina for £50,000 plus VAT on 20 March 2020. Tom does not use the cash accounting scheme and is on calendar VAT quarters, so he raised a sales invoice to Tina on 1 April 2020. This means that output tax of £10,000 will be included on his June rather than March VAT return, i.e. a three-month cash-flow advantage. There is no problem doing this because the time gap between the supply of goods and invoice date is less than 14 days.

Trap. If Tina processes this invoice into April and pays on 30-day terms after the end of the calendar month, i.e. 30 May, this created a one-month delay in the payment of the invoice, not a good outcome for Tom.

Cash accounting scheme

An alternative solution that offers a similar cash-flow advantage is to join the cash accounting scheme if your business is eligible, i.e. you expect your taxable sales will be less than £1.35m excluding VAT in the next twelve months. Output tax is then accounted for based on the date that your customers pay you. Detailed guidance is in VAT Notice 731 (see The next step ).

For a link to VAT Notice 731, visit http://tipsandadvice-vat.co.uk/download (VA 10.08.02).