How can I manage the cash flow with my VAT payments? - PKF Francis Clark
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How can I manage the cash flow with my VAT payments?

*Important update: The deferral of VAT payments has been announced by HMRC. There will be an automatic offer to defer VAT payments during the period 20 March to 30 June, with the taxpayer given until the end of the 2020/21 tax year to settle liabilities accumulated during the deferral period. Click here for more information.

No applications are necessary, businesses will simply not need to pay any VAT liabilities to HMRC that are due in this period but they should continue to submit returns in time.  We recommend that businesses cancel any existing direct debit arrangement to pay VAT liabilities in this period.

Businesses will be given until the end of the 2020/2021 tax year to pay any liabilities that have accumulated during the deferral period.

This is great news and will give businesses an immediate cash flow advantage.  Below are further tips to help with cash flow after the deferral period.

Change your VAT stagger or move to monthly VAT returns

Businesses should consider moving to monthly VAT returns to ease pressure on cash flow particularly if their income has decreased or they expect it to decrease in the weeks ahead and they will likely be due VAT repayments.

To change from quarterly to monthly VAT returns, you can log on to your VAT online services account and select ‘change registration details’. Alternatively form VAT484 can be completed and sent to HMRC in the post.

Businesses can also change their current VAT stagger, depending on the timing this could create a longer VAT period.

In order for the change to be actioned in the current VAT period, you would need to notify HMRC, ideally by the Tuesday before the 3rd Friday of the month.

Reduce payments on account

Payments on account (POA) have to be made where the total VAT liability of a VAT registered entity (including a VAT group) exceeds £2.3M in any 12 month period (or less).  The level of the POAs is set based on the total VAT liability in the 12 months to September, October or November each year and is reviewed annually.  If the total VAT liability in a 12 month period goes up or down by more than 20% HMRC will adjust the level of the POAs. If the total VAT liability falls below £2.3M in a 12 month period HMRC should remove the taxpayer from POAs, this would usually take effect 6 months after the normal review date.

Clients who are in the POA regime should consider the following which could assist cash flow although of course it will not affect the overall VAT liability for each VAT quarter.

  • Lower payments on account

A taxpayer can ask HMRC to lower the POAs if the total VAT liability will be less than 80% of the liability HMRC used to calculate the payments.  This applies to either:

  • The total VAT liability in the previous 12 months. This looks at any month end not just a VAT quarter end;
  • The total VAT liability in a year that has started. An estimate should be provided of future VAT returns
  • Removal from payments on account

If the total VAT liability falls below £1.8M in a 12 month period after the normal review date, the taxpayer can make a request to HMRC to be removed from the POA scheme.  

Bad debt relief

Businesses should review their old debtors as they may be able to claim bad debt relief on their VAT returns.  In order to claim bad debt relief:

  • You must already have accounted for the VAT on the supplies and paid it to HMRC
  • You must have written off the debt in your day to day VAT accounts and transferred it to a separate bad debt account
  • The value of the supply must not be more than the customary selling price
  • The debt must not have been paid, sold or factored under a valid legal assignment
  • The debt must have remained unpaid for a period of 6 months after the later of:
    • the time payment was due and payable; and
    • the date of the supply

Tax Points

If you make continuous supplies of services, you may be able to issue Requests for Payment (RFP) rather than VAT invoices. A RFP does not create a tax point for VAT purposes. VAT should be accounted for once your customer has paid the amount due.  Once payment is made, you should issue your customer a VAT invoice. The types of supplies that generally fall within the scope of continuous supplies are (this list is not exhaustive):

  • ongoing professional services
  • the services of a trustee;
  • regular or periodic maintenance work;
  • services supplied by credit card companies to retailers;
  • club membership;
  • management services;
  • agency services;
  • long-term loans or secondments of staff; and
  • hire, lease or rental of equipment
  • rents due under a lease

Switch to cash accounting

Businesses with a turnover of £1.35M or less can join the cash accounting scheme.  Under the scheme, VAT is accounted on sales when your customer pays your invoice rather than when the invoice date and VAT incurred on purchases is recovered when you have paid your supplier.

The scheme benefits those businesses that have long payment terms with their customers.

VAT de-registration

If your taxable turnover is less than £83,000 or you expect it to fall below £83,000 in the next 12 months you can de-register from VAT.

Before de-registering, you should consider the value of stock and assets currently held in the business as a deemed supply will be necessary where the value exceeds £6,000. Care should be taken if the business owns land and property.

Join or leave the flat rate scheme

Businesses with a turnover of £150,000 or less could join the flat rate scheme.  The scheme is designed to simplify VAT accounting by accounting for VAT using a flat rate percentage of gross sales.  There are different flat rate percentages depending on the trade sector of the businesses.  The rates vary from 4% for food retailers and up to 16.5% for certain businesses that do not incur a lot of VAT on costs.

Under the scheme most VAT incurred on costs cannot be recovered (there are some exclusions), so it may not benefit those businesses that incur a lot of VAT on their costs.  Those businesses that are already on the scheme and incur a lot of VAT on costs may benefit from leaving the scheme.

Time to Pay Arrangements

If you are unable to pay the VAT in full by the due date, you should call HMRC immediately using the following details to set up a Time to Pay Arrangement (TTP):

  • HMRC Coronavirus Helpline
    Telephone: 0800 015 9559
    Monday to Friday, 8am to 8pm
    Saturday, 8am to 4pm
  • Payment Support Service – other
    Telephone: 0300 200 3835
    Monday to Friday, 8am to 8pm
    Saturday, 8am to 4pm

HMRC will use its discretion to allow you to pay over a period of time.  This agreement would normally only be agreed with HMRC if it is satisfied that you cannot pay the liability on the actual due date and that you will have the means to pay the taxes included in the TTP arrangement and any other tax liabilities becoming due during this period.  Before Contacting HMRC:

HMRC will need to know:

  • Tax reference number (for example, your 10-digit Unique Taxpayer Reference or VAT reference number)
  • The amount of the tax bill they finding it difficult to pay and the reasons why
  • What is being done to try to get the money to pay the bill
  • How much can be paid immediately and how long is needed to pay the rest
  • Your bank account details

HMRC will ask for information about:

  • Income and expenditure
  • Assets, like savings and investments
  • What you’re doing to get tax payments back in order

HMRC will decide whether you should be able to pay immediately. If you cannot, it will decide whether you’ll be able to get your payments back on track with more time.

Important to note:

  • Submit the VAT return on time, even if it cannot be paid in full
  • Phone HMRC TTP teams before the payment due date, but after the return has been submitted, and request TTP (even if they do not propose or agree a payment plan at this time) to avoid a Default Surcharge
  • Ensure a note is retained of the HMRC officer, time of call and keep a written record of the outcome
  • If you cannot get through by phone send a written request prior to the payment due date
  • If TTP is agreed confirm with HMRC that any Default Surcharge will not be issued
  • If only a part payment can be made on time it is still important to request TTP before the payment due date for the remaining amount
  • If incorrect VAT returns are submitted to help with cash flow HMRC will view this as a deliberate error and penalties would be charged accordingly, potentially up to 100% of the under declared VAT. Always submit a true and accurate return even if payment cannot be made.
  • It is possible to request credits on other taxes to be set against VAT amounts due but this would have to be requested from HMRC. HMRC are usually reluctant to off-set debts and credits and this would normally require the request to be in writing, however under current circumstances a phone call is recommended.
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