Efficiently managing your VAT liabilities to improve cashflow

Efficiently managing your VAT liabilities to improve cashflow

For some businesses VAT and indirect taxes are an ever-increasing burden. The associated rules and procedures are regularly evolving, making the tax progressively more complex. At a rate of 20%, VAT is a significant business outlay and can have a big impact on cashflow. However, businesses can take a number of actions to ensure their VAT position is optimised and subsequently improve cashflow. Some of these actions are explored below.

VAT registration

Any UK business with an annual turnover of more than £85,000 is required to register for VAT.  However, in some cases it may be preferable to register sooner. Being VAT registered can provide:

• A perceived reputational benefit from being a VAT registered organisation
• The advantage of being able to claim back the VAT incurred on expenses from HMRC. In some cases this could be before the purchase invoice needs to be paid
• The ability to apply for the Cash Accounting Scheme and other margin schemes. These schemes allow businesses to account for VAT at the point of payment rather than invoice date. They remove any cashflow disadvantage created by late payments. To be eligible, a business must have a VAT taxable turnover of £1.35 million or less.

Manage your VAT liabilities efficiently

VAT returns

To accelerate VAT repayments from HMRC, it may be worth changing from quarterly submissions to monthly returns. It’s important that the business has the necessary resource in place to be able to comply with the increased number of returns.

VAT accounting schemes

HMRC offer a number of accounting schemes that are designed to help smaller businesses pay less VAT or pay it later. These include the standard VAT accounting scheme, Cash Accounting Scheme (as mentioned above), Annual Accounting Scheme and Flat Rate Scheme.

While standard VAT accounting is the most common method, the Flat Rate Scheme is often chosen by small businesses as it is less cumbersome from an administration perspective.

Sector specific opportunities

Businesses in the hotel, construction, financial and retail sectors can benefit from VAT opportunities that apply to their activities. Retrospective reclaims can be made for a period of up to four years. The opportunities include the VAT treatment of cancellation charges, construction services, fund management fees, vouchers and delivery charges.

Bad debt relief claims

If payments for supplies of goods or services aren’t received after 6 months businesses can claim back the VAT declared and paid on sales from HMRC. Specific conditions need to be met but this can be a good way of recouping some important funds.

It’s important to note that the VAT recovered on unpaid purchases is also repayable to HMRC under the same rules.

Annual adjustments

Businesses that generate income that is exempt from VAT (those in the financial, insurance, healthcare, property sectors, to name a few) or have activities that are classified as being non-business (provided for free) are required to perform VAT partial exemption and non-business calculations to confirm the value of VAT they can claim back from HMRC.

They are also required to perform annual adjustment calculations to ‘average’ their recovery over each 12 month period. This can result in additional repayments or payments of VAT from or to HMRC. It also provides an opportunity to reflect on the overall VAT position and to make refinements that can result in savings or efficiencies.

Adjustments need to be included on VAT returns for the June/July/August VAT periods - depending on when VAT returns are submitted to HMRC. Adjustments can also affect expenditure that is subject to the capital goods scheme, and once again additional repayments or payments of VAT may be due from or to HMRC.

Avoiding late payment penalties

It’s a fairly obvious point, but it is still a regular occurrence for businesses to fall into the late VAT payment category. A new points-based regime was introduced in January 2023, which was largely welcomed as it is seen as a fairer penalty scheme A £200 financial penalty still exists for repeat offenders when the specified number of points are accrued.

The following points are worth considering as a way of avoiding or reducing a late payment penalty:

• Introducing a direct debit arrangement with HMRC which allows them to collect VAT at a designated time
• As penalties are charged according to the VAT owed at the end of days 15 and 30 making part payments could be beneficial - if the full payment cannot be made

If you are experiencing payment issues, our Banking & Finance specialists can assist with a funding service to allow you to cover the cost of your taxes for up to 12 months. Through this tax funding plan, there is the ability to spread the tax liability, preserve cashflow, prevent HMRC late payment charges and ultimately ensure peace of mind. 

Calls for reinstatement of OTS

The Office of Tax Simplification (OTS) was abolished as part of September 2022’s mini-Budget, but there have been repeated calls for this to be reconsidered.

VAT, like all aspects of tax, can be complicated, and an independent body could play an important part in helping tackle the paperwork burden businesses are facing. Despite some headway being made by Government in the likes of customs procedures, an organisation dedicated to simplifying tax could help make progress in this area with a greater chance of success.

We are here to help

If you have any questions on managing your VAT liabilities or need to discuss your particular circumstances, please get in touch with a member of our specialist VAT team or your usual Azets advisor.

Information correct at time of publishing, but may be subject to change in future. This article is for general information only and is not intended to be advice to any specific person. You are recommended to seek professional advice before taking or refraining from taking action on the basis of the contents of this article.