The VAT man is not generally regarded with much affection by businesses but, with times getting tougher, there are several ways in which cash-flow can be eased by optimising your VAT arrangements.
The most important thing to note about VAT is that failing to pay on time leads to automatic and substantial penalties, starting at 2 per cent of the VAT due and increasing, if multiple payments are late, to 15 per cent. It is therefore important to do what you can to make sure you stay ‘on time’ with your VAT and taking advice is recommended if this is difficult.
However, there are several things you can do to reduce your VAT liability.
Firstly, you are allowed to write back the VAT payable (using the ‘bad debt relief’ provisions) on any unpaid invoice which is more than six months old. The VAT becomes due again only when it is paid.
Secondly, if you meet the necessary conditions as regards turnover, consider moving to the ‘cash accounting’ scheme if your standard rated supplies are greater than your standard rated expenses. Under cash accounting, VAT is dealt with on a receipts and payments basis – the VAT on debtors is not paid until the debt is paid. However, do think through this decision carefully as whether or not it will be beneficial depends on a variety of factors.
If you supply services on a continuing basis, you can send ‘requests for payment’, rather than invoices. No VAT is payable on a request for payment until payment is received. This has cash-flow advantages, but it does entail an increase in paperwork as when the request for payment is settled, a VAT receipt must then be issued.
If you add a charge for late payment or provide a discount for early payment, the charge made or the amount of the payment which relates to the settlement discount not taken is not subject to VAT. It may be worth rewriting your terms of trade to include a settlement discount or finance charge.