Improving VAT cash flow for commercial property landlords

VAT may be able to create important cash flow advantages. This article outlines just one option that commercial property landlords should consider, allowing them to realise a significant cash advantage.

The coronavirus outbreak means that a number of businesses are seeking ways to improve cash flow. One area that commercial property landlords may wish to explore involves a change in the invoicing of VAT-bearing rental invoices. The benefit of this approach is that it means VAT due to HMRC on the supply need only be paid to HMRC after the lease payment is received from the tenant, as opposed to on issue of the invoice. 

We can unlock this saving by introducing a ‘request for payment' (RFP) or ‘pro-forma’ invoicing system. This means that a landlord issues an RFP to the tenant instead of a VAT invoice. This is useful because a request for payment does not trigger a need to account for VAT to HMRC (a ‘tax point’). However, a VAT invoice must be issued to the customer once payment is settled, allowing for the VAT to be paid to HMRC in the same period when payment is actually received. 

This means that the request for payment invoicing creates automatic bad debt relief for the VAT accounted for on invoices issued, instead of needing to reclaim these amounts from HMRC under the formal bad debt relief rules (which can take up to six months and are subject to several other conditions). 

There are a number of process, accounting and commercial issues that must be carefully considered before embarking on this change. RSM’s VAT team are very experienced in implementing this system and helping businesses adapt their systems to comply with the new approach. 

To discuss the above in more detail, please contact

Philip Munn Philip Munn

Partner