Although HMRC have put specific measures in place to help businesses with their VAT obligations during the current COVID-19 pandemic theses are in the main temporary measures. There already a number of existing VAT accounting processes that can be put in place to ensure that the burden of VAT cash flow issues arising are minimised. Here are some of the areas that are worth reviewing:
Bad debt relief
Subject to certain conditions all VAT registered organisations using the normal tax point rules can make a claim under bad debt relief where their sales invoice has not been paid within six months of its due date. The debt has to be written off in the accounts and in this way the VAT due on the invoice which has already been paid to HMRC as output tax can be adjusted through the VAT return when the claim for bad debt relief is made.
It also needs to be noted that there are similar provisions for creditors where any VAT claimed on a purchase invoice which has not been paid within six months of its due date has to be repaid to HMRC.
Under this scheme the accounting date for VAT purposes shifts from the usual tax point date of the invoice to the date when the payment is received or made. This removes the issues of accounting for VAT on invoices which are not paid. The Scheme is open to any business where the taxable turnover is expected to be below a VAT exclusive figure of £1.35 million over the following twelve month period.
Tax points and continuous supplies of services under normal VAT accounting rules there is a basic tax point when services are performed/completed. However there are special rules for those supplies of services which provide that payment is made periodically. These types of services are referred to as continuous supplies of services; there are no basic tax points and the actual tax point is restricted to the earlier of the receipt of payment or date of the tax invoice.
This process will usually mean that the supplier issues a request for payment for the services and follows it up with a tax invoice once the payment has been received.
There is a cash flow benefit as the output tax is only paid to HMRC once the payment has been received from the customer.
Returns and error correction
It is worth monitoring the VAT accounting figures to pick up on changes quickly. A switch can be made from quarterly to monthly VAT accounting periods where a business expects to be in a repayment position.
In addition, a review of the VAT accounting should help identify any errors promptly. These can be corrected through the returns where they fall below certain limits but there is not anything to stop a disclosure being made outside of the returns. In some cases an over payment corrected in this way can be quicker than waiting for the due date of the VAT return to take it into account. However there is no guarantee that a disclosure will be quicker as HMRC are currently taking some time to process error adjustments. If return preparation is an issue a request can be made to HMRC to use estimated figures. This should be done before the due date of the relevant return.
HMRC are still carrying out checks to verify repayment returns and it is always worthwhile to have the documents to support a claim readily available so that it can be provided to HMRC quickly to resolve the check so that repayment is released.
Where any schemes are used ensure that they are still appropriate. In particular anyone using the Flat Rate Scheme who experiences change in their trading pattern should carry out an exercise to see whether it is more beneficial to return to normal VAT accounting than to continue using the Scheme.
VAT has to be accounted for on supplies of goods and services made between commonly controlled companies where output tax has to be accounted for by the supplier and input tax can be claimed by the recipient. The dates of the VAT returns for each company should be the same to remove the cash flow disadvantage. A further way of resolving this would be to set up a VAT group for the companies so that any supplies between them are disregarded for VAT purposes and treated as outside of the scope of VAT.
There are other advantages to a VAT group in terms of reduced administrative and compliance costs, but any application needs careful thought as there is joint and several liability for all group members for the tax due from the representative member.
Large VAT payers (those whose liability is higher than £2.3 million a year) are required to make installment payments on account to HMRC rather than making payments by the due dates of their VAT returns. If the liability falls it is worth contacting HMRC to agree a reduction in the installment amounts or, depending on the values and timings, to discuss removal from the Scheme.
- Please get in touch if you would like to discuss any of these issues in greater depth.