UK VAT cashflow

As many businesses and organisations struggle with high inflation and significant increases in energy prices, rents, and interest rates, managing cashflows will be more important than ever. In this article we highlight a number of established opportunities to achieve VAT cashflow savings.

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. Some hotel booking sites do not issue VAT invoices and where this is the case it may be possible to obtain an invoice directly from the accommodation provider.

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.

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 EU countries can still make a claim for overseas VAT on some costs using the EU VAT refund scheme. Claims for a calendar year must be submitted by 30 September of the following year.

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.

Payment on Account

If your current total VAT liability is or will be 80% less than that used by HMRC to calculate your monthly payments on account, an approach can be made to HMRC to have the payments on account reduced. Alternatively, if your business has seasonal fluctuations, it may be preferable to change to submission of monthly returns, so only the actual VAT liability for the period is payable.

Import VAT claims

Following Brexit import VAT became payable at the time of import on goods moving into the UK from the EU. To aid cash flow for businesses HMRC introduced Postponed Import VAT Accounting (PIVA). PIVA enables a business to account for VAT on imports on its VAT return rather than pay the tax at the time of import. There is no requirement to register for PIVA, a business should notify its import agent of their decision to use PIVA and download PIVA statements for inclusion on its VAT return.

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.  

Time to Pay

If a business is unable to pay its VAT liabilities it may be possible to agree a time to pay arrangement with HMRC. Contacting HMRC and agreeing a time to pay agreement in advance of the due date should prevent late payment penalties being imposed, however late payment interest would still be payable.

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