Cash flow, Carillion and VAT

With the sad demise of Carillion it is likely that a wide range of businesses will be suffering adverse cash flow and may be unable to pay their VAT liability to HMRC. There are a number of ways that a business can improve its cash flow and possibly reduce its VAT liability:

 1. Cash accounting

 It is possible for many businesses with a turnover of below £1.35 million to use cash accounting so that VAT is only declared or claimed when the customer pays or a supplier is paid. This gives immediate VAT bad debt relief and can be useful provided that a business is not in a VAT repayment position with HMRC.

 2. VAT Bad debt relief

 Businesses that are not eligible to use cash accounting often fail to recover VAT on bad debts where the debtor has failed to pay six months after the due date for payment. Provided that the supplier has declared and paid the VAT to HMRC, it can be recovered as input VAT on the supplier’s VAT return once the six month period has expired. The VAT must also be written of to a VAT bad debt account, although the debtor can still be pursued for payment. Any VAT claimed on purchases where the supplier has not been paid for more than six months post the due date for payment must also be returned to HMRC via the purchasers VAT return.

 3. Reviewing how the business  accounts for VAT

 It is surprising how many businesses make simple VAT errors such as incorrectly treating supplies as subject to standard rate VAT that may be zero rate or even VAT exempt or outside the scope of VAT, or fail to claim VAT on costs such as mileage allowances. This can result in the business simply “throwing away” money to HMRC and if the business has unfortunately under declared VAT it stands to lose more money in the form of an assessment, penalties and interest from HMRC. Investing in a VAT review can be a way of saving money long term.

 4. Challenging VAT assessments

 If a business has a VAT visit from HMRC it may also receive an assessment for VAT. Many businesses simply accept VAT assessments without challenging them. Of course many assessments issued by HMRC are correct however there are a number that should be challenged either because the officer has misunderstood the VAT position or has incorrectly calculated the assessment. In addition, it is possible to challenge the imposition of penalties as they may not be due, dependant on the individual circumstances of the case.

 5. VAT groups – Payments on Account

 If your VAT group is required to make VAT payments on account (“POA”) to HMRC, have you considered de-VAT grouping? This can reduce the VAT throughput and take the businesses out of the POA regime. Obviously this would need to be considered carefully to ensure that de-grouping does not have over unforeseen consequences but it can be worth considering.

 6. Ask HMRC for Time to Pay

 HMRC can offer time to pay debts and it is usually much easier to negotiate extended time to pay if the request is made in advance of the debt becoming due. Irrespective of this, if a business has a VAT debt it can still be possible to negotiate payment terms even if debt collection action has started. The main point is always ask HMRC if you can be granted time to pay as if you do not ask it certainly won’t be offered!

 7. VAT training

 Does your team understand how to account for VAT? Have they moved from a business in one type of sector to a completely different business in another sector such as moving from a manufacturer to a charity? It is often worth investing in quality VAT training to ensure that your business is VAT compliant, maximises any VAT savings opportunities and avoids falling into common VAT traps. Our VAT training manager Tamara Habberley would be happy to discuss VAT training opportunities with you.

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