Cash flow savings ideas for VAT

Having survived the cash flow impact of restrictions on trade during the pandemic, businesses are now facing further financial pressure from the withdrawal of coronavirus-related government support schemes. Meanwhile, the cost of living crisis, caused by a combination of high inflation outstripping wage increases and soaring energy costs, means that many customers will be looking to cut down on the goods and services they buy.

In this difficult environment, cash flow savings may be more valuable to business than ever. With this in mind, here are some ideas for how you can reorder your VAT strategy to optimise cash flow in your organisation.

• Monthly VAT returns – businesses that claim regular VAT repayments from HMRC should change from quarterly to monthly VAT returns if they have not already done so. Monthly VAT returns should be submitted as soon as possible after the end of the month to encourage HMRC to process refunds quickly.
• Input tax accruals – identify purchase invoices that are dated within the current VAT accounting period but have not been entered into the accounts until after they have been closed off for the period. The recoverable VAT should then be added to the input tax on the current VAT return for that VAT period rather than waiting until the next return. Adopting this approach provides a permanent one-off cash flow saving, with the effect of opening input tax accruals required to be reversed in subsequent periods as new accruals are identified and claimed.
• VAT refunds – consider submitting claims for refunds of VAT paid overseas (or paid in the UK by overseas businesses) now, rather than waiting for the deadlines (31 December for 13th Directive refunds) for making such claims.
• Delay in tax point by commercial landlords – landlords asked by commercial tenants to delay rental payments or request rent free periods should consider deferring the issue of relevant invoices or issuing payment requests/pro-forma invoices instead, which do not create a tax point for VAT purposes.
• Tour operators – consider using method 1 to determine the tax point under the Tour Operators Margin Scheme (TOMS). Under method 1, the tax point for VAT purposes is the date on which the traveller departs, rather than the date of receipt of payment. HMRC also accepts that, in the event of a cancellation, there is no tax point for the supply under method 1, so VAT does not have to be accounted for on retained deposits.
• Bad debt relief – businesses that have made supplies to customers for which they have not been paid are entitled to claim relief from VAT on bad debts. This applies to debts that remain unpaid for a period of six months after the later of the time the repayment is due and the date of the supply. Relief is conditional on the VAT having been accounted for on the supply and paid to HMRC, and the debt being written off in the day to day VAT accounts and transferred into a separate bad debt account.
• Review VAT groups – where members of VAT groups consist of both payment and repayment businesses, consider adding or removing entities from the group to segregate payment and repayment businesses into separate VAT registrations. This could speed up repayments and/or avoid them being offset by payments.
• VAT postponed accounting and duty deferment for imported goods – UK VAT registered entities may use postponed VAT accounting to account for import VAT on imported goods in their VAT return which covers the date of import. This means the importer may both charge itself this import VAT then, subject to the normal rules, recover it on the same VAT return, rather than having to pay this VAT upfront when the goods are imported and recover it later. To benefit from postponed VAT accounting, the importer must ensure that their VAT registration number is quoted on the customs entry for the goods. Also, instead of paying customs and excise duties at the time of import, businesses should consider applying for a duty deferment account to delay payment. The charges deferred during the calendar month must be paid as a total sum on the 15th day of the following month. Applicants must obtain a bank guarantee as security.
• Customs warehousing – importers should consider placing goods in a customs warehouse, where they can be stored with customs charges suspended until the goods are removed for use.

It is also important to ensure online systems are working well so that staff, customers and other stakeholders have the information they need to meet compliance requirements and plan proactively. The trading climate is sure to keep evolving in the coming months and years, so businesses should always ensure their VAT planning and strategy is kept flexible and revisited regularly to make sure it remains effective.

For more information, please get in touch with Ian Carpenter, Philip Munn or your usual RSM contact.