Overlooked but simple UK VAT reliefs that can ease your cash flow
Organizations can always benefit from an improved cash-flow position and given the current pressures on businesses arising from COVID-19 and disruptions to supply chains, this year is no exception.
This article provides a reminder of some well established but often overlooked UK VAT cash-flow measures that businesses can implement.
VAT bad debt relief
Businesses who have not received payment from their customers more than six months after the due date of payment are entitled to bad debt relief to reduce their VAT payable to HMRC.
Using bad debt relief, the output VAT previously accounted for and paid to HMRC can be reclaimed on the VAT return. If the customer subsequently makes payment, output tax needs to be accounted for and paid again to HMRC.
Note, whilst the bad debt relief provisions can be applied for debtors, in respect of a business’ creditors they must be applied. Business should therefore ensure the same exercise is carried out where for their suppliers they have reclaimed the VAT but payment is more than six months overdue.
Expense claims
Businesses should review whether claims are being made for VAT incurred on employees’ expense claims. If not, are valid VAT receipts held which would support VAT recovery for items such as hotels, travel, subsistence and staff entertaining?
Whilst it’s likely that these activities might have been significantly reduced in the past 18 months, ahead of a (hopefully) upsurge this year in activity steps should be taken to ensure this is best managed going forward. Those businesses who book travel and accommodation centrally should also review whether VAT is claimed on invoices addressed to the business.
Purchase accruals
Businesses receiving purchase invoices dated during the VAT return period, but received or entered into the accounts after the quarter end can still include this input tax on their VAT returns. For large VAT bearing costs received after the quarter end, processing the invoice for inclusion in the VAT return can provide a significant cash injection. It’s possible that remote working and disruptions to the work force may have resulted in increased delays to purchase invoices being received and authorised for payment further increasing the possible value of an input VAT accrual.
Tax points
The tax point determines the date on which a VAT charge crystallises. Businesses should consider how they are creating VAT tax points for their supplies and whether there is scope for delaying this. For example, it may be possible to raise pro forma invoices/ requests for payment rather than issuing VAT invoices up front or, for businesses in the construction sector, to raise applications for payments. In these situations, the time of supply (i.e. when VAT becomes due), can be delayed, most likely to when the customer makes payment rather than the date the VAT invoice was issued.
Overseas VAT costs
UK businesses incurring VAT in other countries can often make claims for overseas VAT recovery. For EU VAT claims, businesses should be aware that the UK is now a 3rd country, meaning that claims are made directly to the overseas tax authorities rather than through the previous HMRC process that applied when the UK was a member of the EU. Care is needed around the time limits for making a claim, the period for which a claim can cover and the need for specific pieces of evidence (i.e. hard copies of original invoices).
VAT grouping
Where charges are made between associated companies, VAT is usually chargeable. AT is accounted for by the supplier and claimed by the recipient entity (subject to their usual VAT recovery position). Depending on the VAT return staggers and when charges are raised, there can be a time delay between the VAT that is paid to HMRC and the VAT that is reclaimed.
One way to mitigate this is to form a VAT group as supplies between members of the same VAT group are usually disregarded for VAT purposes. There can be additional pros and cons to VAT grouping, so this should be considered before implementing.
Monthly VAT returns
Some businesses will be in a repayment position with HMRC i.e. receiving funds from HMRC. These are typically businesses who are:
- Starting up so incurring VAT on costs but have not yet made taxable supplies
- Making supplies that are predominantly subject to the zero rate of VAT or outside the scope of VAT
Some of these businesses prefer to submit quarterly returns, due to the increased admin of monthly returns. However, businesses can request to move on to monthly VAT returns to assist with receiving quicker repayments from HMRC.
Import VAT claims
When goods are imported into the UK from another country import VAT is payable. Experience has shown that many organizations are struggling with the changes arising from Brexit to the process for bringing goods to the UK and the consequent requirements for customs declarations and paying and reclaiming import VAT.
Frequently, businesses are unsure whether they have paid import VAT and, if so, how it is to be reclaimed. The consequence of the uncertainties is that it not uncommon for businesses to have imported goods and then be ‘missing’ import VAT. As most businesses trading in goods are able to reclaim the VAT they incur it is crucial to ensure that the correct administrative steps are taken so that the import VAT paid can be recovered.
Businesses might also want to ensure that postponed accounting for import VAT is applied where possible. This enables the goods to be cleared without import VAT being paid, because that is achieved by including it on the VAT return. At the same time the VAT can also be recovered and hence for most businesses the amounts will net off, giving a cash flow advantage.
Cash accounting
Businesses with VATable turnover that is less than £1.35m per annum can use VAT cash accounting. VAT on sales and purchases is accounted for when payment is received or remitted. This can be particularly beneficial for businesses who have low VAT bearing costs but who may not always receive prompt payment from customers.