COVID-19 Business support: VAT cashflow management

During these difficult times, most businesses are facing a sudden and unexpected drop in turnover and are looking for ways to improve cashflow. One way is to look at managing VAT cashflow to help to ease some of the burden.

Reclaiming VAT

In our experience, many businesses do not reclaim VAT on purchases until suppliers have been paid.  VAT can be reclaimed as soon as a VAT invoice is received from the supplier (please note that under the bad debt relief provisions, there is a six month time limit at which point the VAT has to be repaid to HMRC).

Cash Accounting Scheme

For businesses with an annual turnover below £1.35 million, there is the option of using the VAT cash accounting scheme. This scheme will benefit businesses who pay more VAT than they recover as VAT is accounted for on payments received or made (not on the usual invoice basis). There are a number of eligibility conditions that must be met.

If businesses are currently on quarterly VAT returns and now find themselves in a net VAT repayment position due to a drop in turnover, they can apply to HMRC to change to monthly VAT returns to speed up the recovery of VAT on costs.

Planning ahead

Thought should be given to the timing of sales (including any taxable asset sales) to gain maximum use of the VAT collected from customers.  Invoicing at the start of the seller’s VAT return period will provide the maximum cash flow benefit.

Property sector

For property businesses, it may be possible to delay tax points by issuing rent demands/pro forma documents instead of proper VAT invoices. VAT would then only become due once payment is received from tenants.

My recommendations

I would recommend that VAT returns are submitted on time, even if your business is unable to pay its VAT liability, as penalties could be imposed otherwise. Other than the VAT deferral which covers all VAT payments due until 30 June 2020, there is a further option of a Time to Pay arrangement if businesses wish to stagger VAT payments over a period of time.

If you need advice or assistance with VAT, Jane Stacey VAT Director is here to support you and your business, please contact Jane if you require any assistance.