How to make the best of the VAT regulations to maximise cash flow
Bought ledger
If you aren’t using Cash Accounting, you can gain a cash flow advantage by claiming VAT on invoices you have received that are dated in the VAT period of the VAT return you are submitting. Of course, this doesn’t include invoices on which you’ve already claimed the VAT.
Cash Accounting
This provides a benefit for you if your annual turnover is up to £1,350,000, and which invoice most of the supplies they make. Under this scheme VAT is payable when the invoice is paid. VAT on purchases can only be recovered when they are paid.
Cash Accounting for large businesses
If you supply services and you do not qualify to use Cash Accounting, you may be able to make use of the rules which allow for VAT to be accounted for when payment is made. To achieve this, you do not issue an invoice for payment, but a “request for payment.” Certain conditions need to be met, but the saving in overdraft interest arising from this can be significant. This option does allow you to recover VAT on receipt of invoices rather than payment.
Duty deferment
Provided you are using the duty deferment system to pay import duty & VAT, you could gain a cash flow benefit by importing goods in the last month of the VAT period. This would reduce the time lag between paying the VAT on the importation and claiming it back on the VAT return.
Monthly returns
Monthly returns can be useful were you are likely to be incurring large amounts of input tax, but only paying relatively little output tax.
Avoid penalties
Penalties are bad for cash flow! Any penalties your business suffers are not allowable against tax, so come straight out of your profits.
You should, as far as possible, ensure that the VAT principles and procedures your business follows minimise the possibility for penalties and interest to be charged by H M Revenue & Customs. The first line of defence should be to ensure that your VAT returns are submitted on time, as this avoids a possible default surcharge, which can be as much as 15% of the VAT owed to H M Revenue & Customs.
Conclusion
You can improve your cash flow by ensuring you take advantage of the VAT rules as they are. There is no need for fancy schemes, which will usually be attacked by H M Revenue & Customs at some point.
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