UK VAT cash flow planning

COVID-19: UK VAT cash flow planning

Overlooked but simple UK VAT reliefs that can ease your cash flow

Robert Marchant, Partner, VAT
26/03/2020
UK VAT cash flow planning

The Government and HMRC have announced new measures to help businesses with their tax payments in these uncertain times. This includes the automatic deferral of VAT payments due between 20 March 2020 and 30 June 2020. However, there are already VAT rules in place which businesses can use to maximise their cash flows. We have highlighted those which can often be overlooked. 

Bad debt relief – all businesses

Businesses who have not received payment from their customers more than six months after the due date of payment are entitled to VAT bad debt relief. This will reduce their VAT payable to HMRC.

Using bad debt relief, the output VAT previously accounted for and paid to HMRC can be reclaimed on the VAT return. If the customer subsequently makes payment, output tax needs to be accounted for and paid to HMRC. 

Note, while the bad debt relief provisions can be applied for debtors, in respect of a business’ creditors they must be applied. Businesses should therefore make sure the same exercise is carried out for suppliers where payment is more than six months overdue.

Expense claims – all businesses

Businesses should review whether claims are being made for employees’ expense claims. If not, are valid VAT receipts held which would support VAT recovery for items such as hotels, travel and subsistence and staff entertaining?  

Businesses who book travel and accommodation centrally should also review whether VAT is claimed on invoices addressed to the business.

Purchase accruals – all businesses

Businesses receiving purchase invoices dated during the VAT return period, but received or entered into the accounts after the quarter end can still include this input tax on their VAT returns. For large VAT bearing costs received after the quarter end, processing the invoice for inclusion in the VAT return can provide a significant cash injection. Going forward, the current disruptions may result in increased delays to purchase invoices being authorised further increasing the possible value of an input VAT accrual. 

Tax points – all businesses

Businesses should consider how they are creating VAT tax points for their supplies and whether there is scope for delaying this. For example, it may be possible to raise pro forma invoices/requests for payment rather than issuing VAT invoices up front, or for businesses in the construction sector, to raise applications for payments. In these situations the time of supply i.e. when VAT becomes due, can be delayed, most likely to when the customer makes payment. 

Overseas VAT costs – business incurring costs overseas

UK businesses incurring VAT in other EU countries can still make a claim for overseas VAT using the EU VAT refund scheme. Claims for the calendar year ending 31 December 2019 must be submitted by 30 September 2020.

VAT grouping – groups of companies

Where supplies are made between associated companies, VAT is usually chargeable.  VAT is accounted for by the supplier and claimed by the recipient entity (subject to their usual VAT recovery position). Depending on the VAT return staggers and when charges are raised, there can be a time delay between the VAT that is paid to HMRC and the VAT that is reclaimed.  

One way to mitigate this is to form a VAT group as supplies between members of the same VAT group are usually disregarded for VAT purposes. There can be additional pros and cons to VAT grouping, so this should be considered before implementing.  

Monthly VAT returns – businesses receiving repayments from HMRC

Some businesses will be in a repayment position with HMRC i.e. receiving funds from HMRC.  These are typically businesses who are:

  • starting up so incurring VAT on costs but have not yet made taxable supplies
  • making supplies that are predominantly subject to the zero rate of VAT or outside the scope of VAT.

Some of these businesses prefer to submit quarterly returns, due to the increased admin of monthly returns. However, businesses can request to move on to monthly VAT returns to assist with receiving quicker repayments from HMRC.  

Import VAT claims – businesses purchasing goods from outside the EU

When goods are imported into the UK from outside the EU, import VAT is payable. This can only be claimed on the VAT return subject to receiving a C79 certificate (a green/yellow document with a monthly summary of imports sent by HMRC in the post).  Businesses should review whether import VAT is claimed, as companies importing goods less frequently can overlook this input tax. As a result of the current pandemic many offices are closed which could mean delays in C79 certificates being received by the person preparing the VAT return submission. HMRC has not announced any changes to the C79 process so businesses should not use other evidence, such as their deferral statement or customs agent documentation to reclaim import VAT. 

Cash accounting – businesses with turnover less than £1.35 million

Businesses with VATable turnover that is less than £1.35 million can use VAT cash accounting.  VAT on sales and purchases is accounted for when payment is received or remitted. This can be particularly beneficial for businesses who have low VAT bearing costs but who may not always receive prompt payment from customers.

Compensation – all businesses

Businesses who receive/pay amounts which are compensatory in nature should consider whether these supplies are taxable. Where payments are more akin to financial settlement of losses caused by a breach of contract or contract termination, these may not be subject to VAT.  

If you would like to discuss bespoke VAT cash flow solutions for your business, please get in contact with Robert Marchant or your usual Crowe contact.

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Robert Marchant
Robert Marchant
Partner, VAT
London