With increasing costs of running your business, supply challenges, and a potential recession, this is a good time to ensure that you manage VAT as effectively as possible within your business.
We have selected a number of opportunities below that may be worth further consideration.
Cash Accounting Scheme
If you expect your business turnover to be £1,350,000 or less in the next year, you can start to use the cash accounting scheme. You do not need to formally apply to HMRC.
Under this scheme, you will pay output tax to HMRC when you have received payment from your customers and reclaim input tax when you pay for your purchases.
This can be particularly beneficial if you routinely do not receive prompt payment from customers and have low VAT bearing costs.
Postponed VAT Accounting
If you currently pay import VAT when the goods enter the country or via a duty deferment account, you may be waiting two to three months before you can reclaim the import VAT on your VAT return.
If you use PVA, you will pay the import VAT via box 1 of the VAT return and reclaim the import VAT (subject to input tax restrictions) via box 4 of the same VAT return.
PVA provides a cashflow advantage in comparison to the payment of VAT at import and a later recovery via the VAT return.
Bad Debt Relief
If you have not received payment from your customers more than six months after, the later of:
- Due date of the payment
- Date of the sales invoice
And you have already declared the output tax relating to the supply to HMRC, you can reclaim this output tax from HMRC via the VAT return.
If/when you receive payment from your customer, you must pay the output tax to HMRC via the VAT return.
Expense claims
As we emerge from Covid-19 and national lockdowns, you may be planning Christmas parties or other social events. If you provide entertainment for employees as a reward or to improve staff morale, you can reclaim the VAT incurred on the cost as input tax. If non-employees also attend, you will need to apportion the input tax.
The exception is if the entertainment is only for directors or partners of the business, this VAT incurred cannot be reclaimed as input tax.
Purchase accruals
If you receive a purchase invoice after the quarter end, but the invoice is dated within the VAT return period, you can reclaim the VAT as input tax on that VAT return.
Overseas VAT costs
If you are incurring VAT on costs in an EU member state, you could claim a refund of the VAT incurred. The claim is made directly to the overseas tax authorities. There are time limits for the submission of reclaim and the deadline for VAT paid in 2022 depending on the EU member state is either 30 June or 30 September 2023.
VAT grouping
If there are charges made between associated companies, VAT is usually charged at the standard rate (20%). The output tax will be paid by one entity and the input tax reclaimed by the associated company via the VAT return.
Supplies made between members of the same VAT group are not supplied for VAT purposes and no VAT is charged. Removing VAT on charges between members of a corporate group will help with cash flow, trapped VAT, and the compliance burden of VAT accounting.
There are other pros and cons about forming a VAT group which should also be considered.
Monthly VAT returns
If you are regularly receiving VAT refunds from HMRC, you can request to move onto monthly VAT returns. This can increase the administration to calculate the VAT returns monthly, but it will mean you could receive repayments from HMRC faster.
Proforma invoices/tax points
The date the output tax is declared depends on the tax point of the transaction. This can be:
- The date you issue an invoice or receive payment from the customer before the goods are provided/services supplied
- The date the goods are provided/services performed
- The date a VAT invoice is issued - up to 14 days after the goods are provided/services supplied
If you usually issue an invoice before supplying goods or services, you will have been paying output tax before you receive payment from the customer.
A proforma invoice or request for payment does not create a tax point for VAT purposes and you will not be required to pay the output tax at that point.
Prompt payment discounts
To help you receive payment from customers quickly, you may offer a prompt payment discount. You initially will record the VAT on the full amount of the invoice. If you receive the payment promptly, you can adjust your records so you only account for VAT on the amount received from your customer.
Your invoice can include ‘A discount of X% of the full price applies if payment is made within Y days of the invoice date. No credit note will be issued. Following payment you must ensure you have only recovered the VAT actually paid’.
Outside the scope of VAT with right to recovery
If you only provide services to customers outside the UK, your income may be outside the scope of VAT. If so, you will not be required to register for VAT.
But if the services you provide would be subject to VAT at 0%, 5% or 20% if supplied to UK customers, it is known as ‘outside the scope of VAT with right to recovery.’
You can register for VAT, not pay output tax, but can reclaim the input tax on your UK business costs.
