CASH FLOW - 07.06.2021

Using VAT to improve cash flow

Cash flow is the lifeline of many companies and in these difficult economic times it’s more important than ever. While VAT is usually viewed in a negative light, there are ways you can use it to improve cash flow. What are they?

Timing your big VAT purchases

Aim to make any large VATable business purchases near to the end of your VAT quarter, so that the reclaim of the VAT paid will be quicker. Similarly, if you make large sales near the beginning of your VAT accounting period, you are more likely to have received payment from your customer before you must pay VAT over to HMRC.

Cash accounting scheme

The cash accounting scheme (CAS) is another alternative that you could consider. It is available for businesses that have an estimated annual turnover of £1.35m or less. Under this scheme, VAT is payable according to the cash received, rather than based on the invoices issued. This means that the business will not end up paying VAT on invoices that haven’t been paid yet. This can result in a much-needed boost to the cash flow of the business. Tip. The CAS can be a great option for your business if your customers are slow payers. Tip. Under the CAS, if you buy goods on credit, you won’t be able to claim the VAT back until you pay for them. Therefore, if your trade creditors are usually higher than your trade debtors, the cash accounting scheme may not be suitable.

Annual accounting scheme

As with the CAS, you can use this scheme if your annual turnover is £1.35m or less. As the name suggests, you only make one VAT return a year, however, you make nine monthly payments during the year (or three quarterly payments) and a balancing payment two months after your year end. The nine monthly payments are based on 10% of the VAT paid to HMRC in the previous year (or 25% if you make three quarterly payments).

Tip. The annual accounting scheme will have cash flow advantages if your sales are going up year by year and means you will know exactly how much you are due to pay for each instalment during the year.

Tip. If you are regularly able to reclaim VAT on your return, then you would not choose this scheme, as you would only receive one repayment a year.

Bad debt relief

If you’re not using the CAS, then you may have to pay VAT to HMRC before you have received payment from your customer. When the debt is overdue for at least six months and written off in your books you can claim bad debt relief on your VAT return. Tip. If you end up receiving the payment, you will need to repay the VAT, so take this into account.

Increase VAT returns

If you normally receive a repayment from HMRC when you submit your VAT return rather than make a payment, you can improve your cash flow by completing monthly VAT returns instead of quarterly or annual returns.

Tip. Consider moving to monthly VAT returns if your business buys standard-rated goods and services but sells a lot of zero-rated goods.

Tip. Ensure you have the time and resources to complete these additional VAT returns and that the potential financial gains outweigh the cost of doing the VAT returns.

Some small changes can have a big impact such as aiming to make any large purchases near the end of a VAT quarter so that the reclaim will be quicker, and moving to monthly VAT returns if you normally get a VAT refund. If your turnover is under £1.35m, consider whether the cash accounting scheme would be beneficial to your cash flow.

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