Cashflow management and VAT
10 Feb 2023
In our last article on cashflow management, we explored business tax liabilities. Following on from this, we now look at the VAT considerations.
Many companies will have taken advantage of the VAT payment deferral scheme which the government introduced during the pandemic.
The deferred liabilities will largely have all now been paid, but cashflow remains a concern for businesses given the current state of the economy, and with inflation and interest rates still relatively high, as well as continued global supply chain issues caused by a number of factors.
Whilst there are currently no general deferrals (like we saw in 2020), there are a wide range of opportunities for businesses to improve their VAT cashflow, some more general in nature and others applicable to specific sectors and circumstances.
Businesses who regularly receive repayments of VAT from HM Revenue & Customs (HMRC) should consider filing their VAT returns on a monthly rather than a quarterly basis. Repayment traders, as HMRC generally refer to them as, are those which have a large proportion of zero-rated supplies, such as suppliers of export goods, housebuilders or suppliers of printed matter and e-publications.
Companies who supply services whose place of supply is outside the UK, would also be in this position as their outputs would not be subject to VAT, but they are still entitled to reclaim VAT incurred on operating costs. Switching to monthly VAT returns is a straight-forward process which requires an application to HMRC, and is a real benefit for those repayment traders as it accelerates the receipt of VAT refunds from HMRC.
For businesses with a turnover of £1.35 million or less, the cash accounting scheme offers the most attractive measure with respect to improving VAT cashflow. Cash accounting means exactly what it says, VAT is brought to account on a date of receipt or payment basis rather than date of invoice. This can be a particular benefit for those companies with longer payment terms, and also for those who have a relatively low VAT bearing cost base. Whilst there are conditions to meet to use cash accounting, an application to HMRC to use it, is not required.
For those businesses not eligible to use cash accounting, the close monitoring of aged debtors becomes critical to ensure VAT bad debt relief is being claimed as soon as possible. When a debt ages more than six months from the later of invoice date or due date for settlement, the VAT paid to HMRC on the invoice can be reclaimed. If the invoice is ultimately settled, then it is important that businesses have a process to ensure the VAT is then paid to HMRC in the period in which the invoice is settled. Having an aged debtors (and creditors – an adjustment is required to VAT recovery if businesses have not paid invoices but have reclaimed VAT and the age is more than six months) process as part of the VAT return procedures enable this adjustment to be made.
VAT recovery can be accelerated by reclaiming VAT based on cost accruals, whilst costs are still going through internal procurement and acceptance processes at the end of the VAT accounting period. Including VAT on accruals in the total VAT to be reclaimed in a VAT period, where all the conditions for VAT recovery are met including holding a valid VAT invoice, will mean the difference between claiming VAT now or in three months’ time. The method used to process the reversal entries in the next period is likely to be influenced by the accounting software in use, and the rules regarding keeping digital VAT accounting records under Making Tax Digital should be considered.
Registering companies which are under common control, together in a VAT group, can also provide an immediate VAT cash flow benefit as it would eliminate the need for VAT to be accounted for on supplies between VAT group members. The added advantage is that supplies between VAT group members are disregarded and therefore a VAT group can assist with managing VAT leakage in a corporate group if there are entities which are exempt from VAT activities. Advice should be taken when considering registering a VAT group as there are important factors to consider aside from the cashflow benefit point.
Land and property
During the pandemic, more landlords began issuing applications for payment to their tenants, many of whom had been forced to cease to trade during lockdown, and struggled to pay their rent on time. An application for payment, in certain circumstances, is not a VAT invoice and its issuance does not trigger VAT being brought to account. Where this process is used, there is no requirement to report the VAT due on rent until the payment is received, giving a cashflow benefit. Upon payment, a VAT invoice must be raised and issued so the process does create a requirement to generate an additional document. This approach provides landlords with VAT cashflow benefits, as they are not having to account for VAT until they receive rental payments.
The domestic reverse charge (DRC) which applies in the construction sector, provides a cashflow benefit to contractors who are required to account for the VAT due on the supply made to it by sub-contractors rather than pay VAT to them. Whilst the DRC was not implemented to aid cashflow in the supply chain, it can work in the recipient’s favour. If the recipient of the construction service is not an ‘end-user’, or does not certify itself to be an end-user to its suppliers, it will account for VAT under the reverse charge rather than paying the VAT on invoice from the sub-contractor.
Under the reverse charge, the recipient will pay and reclaim (subject to the usual rules on partial exemption) the VAT at the same time. It is recommended that recipients who are considering withholding end-user status declarations take advice before taking any action in this respect, as it can create a cashflow issue for sub-contractors if VAT received form part of their cashflow management.
The introduction of postponed import VAT accounting (PIVA) from 1 January 2021 has provided a cashflow boost to importers of goods. Previously, import VAT would have to be paid at the time of importation or shortly afterwards through a deferment account. Importers would then have to wait until they submitted their VAT returns to reclaim the import VAT paid. PIVA enables importers to pay import VAT through their VAT returns, so they are paying and reclaiming at the same time, rather than having to fund the import VAT for up to three months. PIVA is still being underutilised but is a simple process to implement, so all importers are strongly encouraged to adopt it. Again, the reclaim here is subject to the usual partial exemption rules.
Aside from import VAT, cashflow benefits can be realised by importing into freeports or customs warehouse regimes (such as bonded warehouses) which delay the point when customs duties become payable, until the goods are discharged from that regime.
Partial exemption methods
VAT cashflow advantages can be gained by reclaiming more VAT on costs incurred. Businesses that are partially exempt (eg making taxable supplies which give the right of VAT deduction and also making supplies which are exempt from VAT and do not give such a right) are required to adopt a prescribed method (the standard method) to calculate how much VAT they can reclaim. The standard method does not always provide a fair and reasonable outcome and applications to HMRC can be made for a special method to be adopted. Agreeing a special method with HMRC, can mean an increased rate of VAT recovery on overhead costs and other non-attributable expenses.
This article provides a general summary of managing cashflow from a VAT perspective, and professional advice should always be sought.
If you require any further information on the points raised here, please get in touch with your usual Saffery Champness contact or speak to Nick Hart.