Enter Your E-mail

VAT Voice by Steve Allen

Steve Allen, Director of VAT Solutions (UK) Ltd, describes how the VAT system can be used to better advantage in assisting traders’ cashflow.Cashflow can be one of the main problems facing businesses these days. This article aims to show you some simple and uncontroversial ways in which your cashflow can be improved using the VAT system.

Every three months you have to pay the VAT return, and when money is tight, this can be difficult. There are two basic things you can do to improve your cashflow when accounting for VAT:

• delay the payment of output tax

• speed up the reclaiming of input tax.

Sounds simple, but how exactly can you do this?

Delay paying output tax

There are a number of things that a business can do, quite legally, to delay the payment of output VAT.

If your turnover is under £660,000 per annum (excluding exempt supplies and sales of capital items) you can use the Cash Accounting Scheme. Using this scheme, you do not need to account for output tax until you have been paid by your customer. This means that your money is not tied up with HM Customs & Excise while you are trying to obtain payment from a customer. An added bonus is that the scheme gives built-in bad debt relief. On the other side, you can only claim your input tax when you pay the supplier. There is also a built-in leeway so that you do not need to leave the scheme until your turnover exceeds £825,000 p.a. You don’t have to complete any forms to join the scheme, nor do you need ask permission or notify Customs. You just start using it. Details can be found in VAT Notice 731.

If you make continuous supplies of services, for example, accountants, lawyers etc, and your turnover is too high to use the cash accounting scheme, you can issue a ‘request for payment’ instead of issuing a tax invoice. This does not create a tax point, and you will only need to account for VAT when you are paid. Exactly the same applies to ‘authenticated receipts’ in the construction industry. However, don’t forget to issue a proper tax invoice when you are paid, and account for VAT at that time.

Sales invoices

Another point that is often overlooked is that you only have to account for VAT when a sales invoice is issued, not when it is produced. So if you produce tax invoices on the last day of your VAT period, and don’t post them until the next day, you can overstamp them with the correct issue date, and delay payment of the VAT by three months.

Under the tax point rules, you have to issue your invoice within 14 days of the basic tax point (date of supply). This creates an actual tax point on the date the invoice is issued, so if it spans the end of a VAT period, you can defer paying the output tax by three months.

If you import goods, you could consider setting up a duty deferment account with HM Customs & Excise. This could delay paying import VAT by up to 45 days. In addition, if you have a good compliance record, from 1 December 2003, you can apply to Customs for a reduced security guarantee. In some cases, it can be reduced to nil so that you can save on bank charges.

VAT flat rate scheme

Changes made at the start of 2004 to the new, and not often used, VAT Flat Rate Scheme mean that small business may now be able to obtain a VAT saving by using it. The Flat Rate Scheme was introduced on 25 April 2002, with the intention of reducing the administration costs of implementing VAT. Customs rather optimistically suggested it could save £1,500 a year in reduced admin costs.

However, the initial take up for the scheme has been poor, as most advisers predicted. There was little, if any, benefit to be derived from administrative savings, and the actual VAT payable by most businesses under the scheme was slightly more than the amount they already paid using conventional VAT accounting.

The main changes introduced from 1 January 2004 were:

• lower rates for all business sectors, averaging a 1% reduction;

• a further 1% reduction for small businesses in their first year of VAT registration;

• an online ‘ready reckoner’ to help businesses and advisers check the potential benefits of the flat rate scheme for their business;

• telephone and e-mail applications to make joining easier; and

• a revised table of flat rate sectors.

These changes mean that the scheme could produce VAT savings for some small, particularly new, businesses.

Speed up input tax repayment

One of the most obvious, but most overlooked, ways of speeding up the repayment of input tax is to accrue for invoices that have not been fully processed onto your system by the time you run the VAT return report.

If you are registered for VAT, you can reclaim input VAT on your purchases on the VAT return covering the date of your purchase invoice, providing you have the necessary evidence to do so. For many businesses, particularly those with more complicated accounting systems, it is not always possible to authorise and enter all the invoices dated within the VAT return period into the accounting system before it closes down for the month. A lot of businesses simply reclaim this VAT on the next VAT return. However, the cashflow disadvantage of claiming the VAT in the correct, earlier period, can be much greater than you would think. We helped a large Plc increase its VAT recovery by nearly £2m in one month simply by accruing for input tax.

Most companies will not be able to achieve one-off cash flow saving of this size, but worthwhile savings can still be achieved by accruing for input tax. If you feel that the administrative burden of accruing input VAT may be high, you may still be able to take advantage of the cashflow benefits, but with far less administrative hassle.

Estimating Input VAT

Under certain circumstances HM Customs & Excise may allow a business to estimate the input VAT it has not been able to reclaim or accrue. Under the VAT General Regulations, Reg 29(3), Customs have the authority to allow a business to estimate its input tax if it cannot accurately account for it when the VAT return is prepared. The main point to stress is that you cannot ‘with all due diligence’ ascertain the correct amount of input VAT you can reclaim.

Always calculate a fair method of estimating the input tax you have not claimed. The best way to do this is to take a representative three-month period and add up the total input tax you have claimed. Then add up the input VAT that you could not reclaim in the relevant month. From this you should be able to easily calculate the percentage of input tax that you can accrue. Write to Customs asking for permission, and include your calculation so he can see that you are using a fair method.

Sometimes, Customs can be difficult, and will say that you are not allowed to estimate an input tax accrual. If they do, refer them to the legislation and their own Internal Guidance, Volume V1-24, Part A, Section 5, para 5.13. Another good ploy is to point out that Public Notice 700/45/02 ‘How to correct VAT errors and make adjustments or claims’ states “if you have had the necessary evidence to enable you to claim the input tax in the period in which you incurred it, but failed to do so, this is an error. You cannot make a late claim using the method in the preceding paragraph (i.e. on the VAT return). Instead, you can make a voluntary disclosure.” Point out to Customs that this means that if he does not permit you to use an estimated accrual you will have to send in Voluntary Disclosures (if over £2,000) all the time, and swamp them with paperwork.

Remember that once you have made an accrual, you will need to adjust for it in the next period, or else you may claim back the input tax twice.

Other opportunities

Don’t overlook making a bad debt relief claim if a debt is six months past payment date. Many companies do not bother, and this can be an expensive mistake. If you have not claimed VAT bad debt relief, you can go back three years from the date payment was due (in effect, three-and-a-half years). The system is simple, in that you just add your bad debt relief claim to box 4 of the VAT return. For debts from 1 January 2003, you no longer have to write to your customer notifying him of your VAT bad debt relief claim either.

If you have a company that receives property rental income, you will normally bill it at the end of each calendar quarter. If this is the case, make sure your VAT returns end February, May, August, and November, as this will gain two months use of the VAT before paying it to Customs.

If you have a number of associated companies, and they make supplies to each other, or you have a parent company making management charges to you, take a look at your VAT return staggers to make sure that you can claim back the input tax in one company before you have to account for the output VAT in the other.

Finally, for businesses receiving regular VAT repayments, there is the option of submitting monthly VAT returns. This will mean a small increase in administration, doing three VAT returns instead of one, but you will get your VAT back two months sooner.

Steve Allen
Director, VAT Solutions (UK) Ltd
Email: steveallen@vatsolutions-uk.com

VAT Solutions (UK) Ltd
11 Winmarleigh Street,
Warrington,
WA1 1NB

(T) 01925 242497
(F) 01925 242498
(M) 07810 433927
(W) www.vatsolutions-uk.com

VAT Solutions (UK) Limited is an established independent firm of Chartered Tax Advisers, formed by Andrew Needham and Steve Allen. The company has a cross-section of clients from multi-national companies through to medium-sized and numerous smaller regional firms of accountants and solicitors. They produce a regular publication 'VAT Voice', which can be downloaded directly from the Internet via the following address: www.vatsolutions-uk.com/newsletter.doc