With increasing costs of running your practice, supply challenges, and a potential upcoming recession, now is a good time to ensure that you manage VAT as effectively as possible within your business.
We have selected several opportunities that may be worth your further consideration, listed below.
Cash Accounting Scheme
If you expect your business turnover to be £1,350,000 or less in the next year, you are eligible for the Cash Accounting Scheme. You can begin to use the scheme whenever you wish, as 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 do not routinely receive prompt payment from customers and have low VAT bearing costs.
Bad Debt Relief
HMRC are able to provide VAT relief on bad debts incurred when you have not been paid for your supply of services to a customer. Output tax on the supply of services can be reclaimed from HMRC, if you have not received payment from your customer for more than six months after the due date of payment as shown on the sales invoice.
You must have already declared the output tax relating to the supply to HMRC, and 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 relevant input tax.
However, if the entertainment is only for directors or partners of the business, the 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. As there are time limits for the submission of a reclaim, the deadline for VAT paid in 2022 is either 30th June or 30th September 2023 (depending on the EU member state).
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.
Proforma invoices/tax points
The date on which 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.
