26 June 2018
Tax points are important, they determine when the VAT you have charged to customers, is paid over to HMRC and also when you can reclaim VAT on a purchase your business has made.
Ordinarily, the invoice will be raised with an invoice date being either date of dispatch or date invoice issued. When completing the VAT return, invoices dated within the VAT return period are included on the return and the business pays over output tax to HMRC. Whether or not the invoice has been paid, the tax point date on the invoice determines when the VAT is to be paid to HMRC.
We are seeing more suppliers demanding longer payment terms, sometimes up to 120 days. This can create a cash-flow issue for your business as you may be paying VAT over to HMRC before the customer has paid you, effectively using your own cash to settle your VAT liability to HMRC.
So what can be done about this?
Cash accounting can be used by a business with turnover of less than £1.35m and once using the scheme can continue to use the scheme until turnover exceeds £1.6m
Cash accounting simply means the date on the invoice is ignored and the date the invoice is paid becomes the new tax point for reporting on the VAT return. For example, business raises an invoice 01 February 2018 for £1,000 + £200 VAT and customer pays in July 2018. Normally, this £200 VAT is declared on the February 2018 VAT return. Under cash accounting, the £200 is declared on the July 2018 VAT return.
As a result, the business has met its obligation to pay HMRC but only when the customer has paid up first. Cash flow is improved whilst meeting supplier payment terms. In addition, should an invoice never be paid, creating a bad debt, having never paid VAT to HMRC, the business does not have to wait 6 months to reclaim VAT back from HMRC under bad debt relief rules.
The downside to the scheme is that the transition between standard and cash accounting needs to be handled carefully – switching to cash accounting at the start of a new VAT period is best, plus the business cannot reclaim input VAT on purchase invoices unless the invoice has been paid (so if the business tends not to pay suppliers on time, the business cannot reclaim VAT on those purchases until the supplier invoice is paid).
Even where your business is over the thresholds for using the scheme, there is the potential to use pro-forma or requests for payments, which create an additional administrative burden for the business but brings the cash flow benefits of cash accounting – but does require some care and effort to get it set up right.
Don’t leave this to chance, so speak to your advisors or speak to us, our VAT advice is not as expensive as you think. VAT.tamworth@hwca.com
