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VAT: Cash Flow Tips & Tricks
Written 9am Friday 27th March.
Whilst many businesses will now be aware of HMRC’s announcement that all VAT payments will be deferred for a three month period between 20 March and 30 June 2020, to help businesses cope with the impact of Covid-19, there are other ways of potentially increasing cash flow and reducing the VAT burden on your business over the coming weeks, depending on your business sector and personal circumstances.
If you don't yet know about VAT deferrals, or if you haven't arranged to defer your other HMRC payments then you should DO THAT NOW! See this page on our website to find out more.
- If your turnover will be significantly impacted over the coming weeks, but you will continue to trade, you may be eligible to use the cash accounting scheme. This scheme enables businesses to only account for VAT on sales made once payment has been received. As above, invoices are replaced with requests for payment and tax invoices only issued when payment is received. You do not need permission to use the scheme, but should not have any outstanding defaults or debts.
- To join the scheme your VAT taxable turnover must be £1.35 million or less in the next 12 months.
- To maximise cash flow benefits as far as possible, when issuing invoices for sales made, assuming requests for payment are not suitable as there is no continuous supply of services taking place, or cash accounting being operated, then we would recommend delaying issue of VAT invoices for sales as far as possible; this will usually be a maximum of 30 days after services have been performed or goods provided, subject to HMRC approval in some instances.
- With respect to purchases, we suggest requesting faster receipt of purchase invoices where possible, to support input tax recovery as soon as possible following purchases.
- Alternatively, businesses should try to identify purchase invoices received which are dated within the current VAT accounting period but which would normally not be included in the accounts until after the VAT return has been closed off for the period. By pulling these invoices into the current VAT return period, the business will benefit from a one of cash flow benefit. Thereafter, the business must ensure that ‘early’ claimed invoices are not included in the next VAT return period, so an adjustment will be required to prevent these being claimed twice.
- If your business regularly receives VAT repayments and you currently submit your returns quarterly, consider moving to monthly returns.
Payments on Account:
- If your VAT liability is greater than £2.3m per annum and you are therefore required to make regular payments on account, you should consider cancelling your interim payments as part of the 3 month VAT deferral extended by HMRC. If these are paid via direct debit, you should make sure these debit arrangements are cancelled as soon as possible.
Bad debt relief:
- Where you have historical debtors, where the payments due are more than 6 months old, you should claim bad debt relief from HMRC, subject to writing off the debt in your accounts, in line with HMRC guidance.
- Equally, however, if you have failed to pay invoices received more than 6 months ago but have claimed the input tax, you are required to adjust your input tax to take account of these outstanding creditors.
VAT errors and reclaims:
- If the business has identified past errors in its VAT returns, where VAT is due back to the business then, subject to the deminimis rules for error corrections, businesses should claim this VAT on the next available VAT return and inform HMRC separately, per HMRC guidance. This ensures speedy reclaims of the previously unclaimed input tax or over declared output tax amounts.
- However, if the errors identified are in favour of HMRC, the business can opt to write to HMRC separately to correct these errors. This course of action is normally reserved for larger errors, (more than £10,000 or up to £50,000 or 1% of Box 6) but can would be recommended for correction of smaller errors in these circumstances, as HMRC will take a number of months to action these corrections, even before the current emergency measures were introduced.
EU refund claims:
- If the business is required to make a claim for VAT incurred overseas, we recommend that these claims are made now, rather than waiting until the deadline of 30 September. This relates to all EU input tax claims relating to expenditure incurred in 2019.
VAT return preparation:
- HMRC has made it clear that VAT returns should still be prepared and submitted during the 3 month deferment period. However, we are aware that many businesses may either have no resources of their own with which to prepare the returns; may be unable to gain access to their online finance systems if these cannot be accessed remotely from home; or may be unable to rely on their accountants to complete their usual VAT compliance service at this time due to them also having staffing constraints.
- Taking all these issues into account, it would seem reasonable for businesses to submit estimated returns during this 3 month period, providing estimates are based on supported data from previous returns and that HMRC are informed that an estimated return has been submitted.
- Normally permission is required in advance of submitting estimated returns, and this would remain our advice. However, in light of the unprecedented circumstances, we would suggest that, where it is not possible to submit a request to use estimated figures in advance of doing so, that businesses should write to HMRC as soon as possible post submission of their next return to make HMRC aware that the figures are an estimate and the basis on which this estimate has been calculated.
Partial Exemption Annual Adjustments:
- Businesses which are required to prepare partial exemption calculations may wish to amend the VAT return period in which they normally include the annual adjustment amount.
- If the adjustment due is in favour of HMRC, we recommend this is included in the VAT return following the partial exemption year end i.e. the first return of the new partial exemption year; and if the adjustment is in favour of the business, it could be included in the VAT return at the end of the current partial exemption year.
- If you have agreed to reduce rental payments or provide rent free periods to your tenants or a period of time, you should also consider changing your invoicing process by either deferring the time in which you would raise an invoice, or stop raising invoices and instead issue requests for payment. In each case, this delays the tax point for VAT, with the latter moving the tax point until payment has been received.
If you have any questions or concerns on this please do not hesitate to get in touch with our VAT Director Maria McConnell (M.McConnell@frenchduncan.co.uk) or any of our team.
Other COVID-19 Information:
For all our help, support and information around COVID-19 / Coronavirus visit www.frenchduncan.co.uk/covid-19, where you can link to articles HMRC deferrals, business loans including Coronavirus Business Interruption Loan Scheme (“CBILS”), personal tax & self-assessment, debt assistance & restructuring and much more.