For most people VAT is the Bain of our lives. For private individuals it is an extra charge on goods and services they purchase, but for businesses it requires extra administration to calculate and submit returns. Once a business is registered, 20% is added to the value of their sales invoices. In exchange they get to claim back any VAT on purchases received. The difference is declared and paid over to the HMRC (or refunded if more purchases than sales). Going on the basis that a business should be earning more than its outgoings, most times you will be handing over the proceeds. Business’s virtually act as an unpaid tax collector on behalf of the government.
It’s not only the payments, but the effort required to record and calculate each transaction to make sure the return is correct. This means accounting for all sales invoices and receipts, verifying their accuracy by reconciling bank accounts and checking that the correct VAT codes have been applied. (See our previous article for “Dummies guide to VAT” and interactive exercise “Stock movement journals download”). What is not realised is that it can be used as a tool in planning your cash flow to your advantage.
If you are on flat rate (pay fixed amount over the year depending on the sector) or cash VAT (on receipt or payment of monies) then you are limited in what you can do. For those on standard VAT scheme, (based on the date of transactions, regardless of whether they have been paid or not) then there is some latitude. These are some examples:
- For start-up companies they can claim all the input VAT for purchases to collect a refund prior to product launch. You may choose to submit monthly returns so that provides a quick cash injection which assists businesses in the early stages when sales invoices are slow. (Also applies to cash VAT but only if paid first).
- If you need to make a large purchase, with a significant amount of input VAT, then you can time the purchase towards the end of the VAT quarter. This reduces the amount of VAT due at the end of the following month, which may coincide with the terms of your supplier.
- On the reverse side, If you deal in large ticket items, that are paid down by instalments (and you are in a cash rich position), you can invoice out the whole amount so that your potential customer gets a refund which helps their cash flow and makes your offer more affordable. My work involves project based invoicing and I have offered this method to get customers over the line.
Ultimately the amount you pay is the same; it just evens out your cash flow to avoid getting a VAT bill that may coincide with another significant outgoing. This process is helped by planning an organisational budget (VAT Cashflow calculator download) and regularly running the VAT report from your software, to keep track of how much you owe and allow for future payments (Enterprise Software). It is also still good practice to separate the VAT component of money received, into a reserve account so that you always have enough to cover the return when due. Always seek accounting advice to determine the most appropriate VAT scheme for your business.
It must always be remembered that VAT is not your money, as it is held in your custody on behalf of HMRC. That doesn’t stop you from using it for short-term gain.
Malcolm Ford has had 25 years business experience including working as a financial controller for small to medium business’s. He now implements enterprise software across a wide range of sectors
