Optimising cashflow – VAT invoices and payments

The old adage ‘Cash is King’ can scarcely have been truer than it is in the current unprecedented times.

Our article Unlocking cashflow through proactive VAT management during COVID-19 (dated 19th March 2020) sets outs some key areas where businesses can optimise their VAT position.

Unfortunately, our experience is that businesses are still not taking good housekeeping steps to proactively manage their cashflow.

Below are just two common errors we are seeing where businesses are not critically looking at their VAT affairs and processes and effectively handing much needed cash to HMRC unnecessarily.

1. Raising VAT invoices instead of Requests for Payments in the first instance.

For certain types of supplies, the tax point (when VAT must be accounted for to HMRC) is not triggered until the earlier of the issue of a VAT invoice or the receipt of payment.

There is not an automatic basic tax point (subject to anti-avoidance measures) for example on completion of works.

By raising a VAT invoice before payment, businesses are in effect:

  • Funding the VAT payable by their customers through their own cashflow when payment is received after the VAT return due date for accounting for VAT on sale; and
  • Running the risk of having paid VAT to HMRC and not getting this back from their customers (or an extended delay in getting the VAT paid back from HMRC via a VAT bad debt relief claim for defaulting customers).

Businesses should instead where possible in the first instance be raising requests for payment (clearly annotated with “This is not a VAT invoice”) and issuing a VAT invoice when they have got paid.

The key areas where this applies are:

  • Continuous supplies of services – where services are supplied on an ongoing basis and consideration due on the services supplied is determined, or payable, periodically or from time to time.
  • Construction contracts that provide for period payments (stage payments)

2. Businesses making VAT Payments on Account not reviewing their position

Businesses who file VAT returns quarterly and owe more than £2.3 million in any period of 12 months or less are directed by HMRC to make payments on account.

The value of payments on accounts are generally based on the amount of VAT the business paid for the previous year ending September/October/ November depending on a business’s VAT stagger.

Due to COVID-19, VAT payments due between 20 March 2020 and 30 June 2020 can be deferred.

Businesses should however be looking to further improve their cashflow position.

Any business making payments on account which is going to have a lower level of VAT to pay in the current  year ending September/October/ November 2020 compared to the previous year ending September/October/ November 2019 needs to review their payments on account to ensure they are not inadvertently hurting their cashflow.

Due to the impact of COVID 19 we anticipate this to be a significant number of businesses in the payment on account regime.

What can be done?

  • If your total VAT liability will fall below £1.8 million, you can ask HMRC’s payments on account team in writing to remove you from the arrangement. You will need to provide information to HMRC as to why you expect your VAT liability to fall below £1.8m.
  • If your total VAT liability (not including the VAT on imports and moving goods into and out of excise warehouses) is or will be less than 80% of the liability the previous year ending September/October/ November 19, you can ask HMRC’s payments on account team in writing to reduce your payments. You will need to provide information to HMRC as to why you expect your VAT liability to reduce
  • If you do not qualify for the above reduction in Payments on account or removal from the payments on account regime alternatives include:
    • Paying your actual monthly liability without submitting monthly returns, allowing you to pay your actual liability for a month at the end of the following month. For example, the payment due at the end of February will be the actual liability for January. You would need to write to HMRC’s payments on account team and would be required to follow this method for at least a year. This method would suit businesses who submit payment returns but have seasonal variations in trade either as part of their normal business operation or because of the of the likely impact of COVID 19.
    • Submitting monthly VAT returns allows you to calculate and pay your VAT liability monthly instead of quarterly and HMRC may allow you up to 7 extra days to submit and pay your VAT return. You may need to submit monthly returns for at least 1 year. If you are expecting a sustained period of VAT repayment you should consider switching to monthly returns in particular and can apply online to switch.

HMRC contact details

If you want HMRC to look again at the payment on account amounts due, think HMRC should remove you from a payments on account arrangement, or wish to move to actuals based payments on account the HMRC contact address is:

Payments on Account Team
Business, Tax and Customs, Liverpool
7th Floor, Regian House
James Street
Liverpool
L75 1AA

How can we help?

Along with support on the above, we can assist businesses in evaluating the scope for VAT (and indeed other tax) cost savings/cash flow optimisation, implementation and dealing with HMRC.

If you would like to contact us regarding VAT cost savings, please contact:

Hydeam Sulton (Head of VAT) – Hydeam.sulton@taitwalker.co.uk
Alastair Wilson (Tax Partner) – Alastair.wilson@taitwalker.co.uk
Andrew Moorby (Tax Partner) – Andrew.moorby@taitwalker.co.uk
Ryan Griffiths (Tax Executive) – Ryan.griffiths@taitwalker.co.uk