In the current economic downturn many businesses are looking at ways to optimise cash flow and reduce costs as far as possible.
With this in mind, the following top tips have been prepared to help you achieve this, irrespective of whether you are a fully taxable or partly exempt business for VAT purposes. Click on each of the below headings for details.
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There is no requirement in VAT legislation for a trader to pay an invoice before it can reclaim the VAT incurred as input tax. However, many businesses have systems in place which only allow posting of an invoice once payment approval has been received. The result of this can be that input VAT is reclaimed 3 months later than it could have been, adversely affecting cash flow. A small change to internal arrangements can accelerate VAT relief for input tax.
Equally, there are often invoices relating to a VAT period that are not issued by suppliers until the customer has already submitted its VAT return covering that period. The customer is therefore unable to recover this VAT at the earliest opportunity.
In these scenarios, it may be possible to agree an accrual method with HM Revenue & Customs (HMRC), which will generate a permanent cash flow saving.
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If your regular suppliers are often late in issuing you with invoices, one solution would be for you to self-bill. This would mean that, subject to certain conditions, you would be able to issue invoices on your supplier’s behalf and recover the VAT as input tax considerably sooner.
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Under the rules relating to the time of supply of goods or services, the point at which VAT must be accounted for can be delayed by up to 14 days. With HMRC’s approval, the 14 day period may even be extended. In these circumstances, the invoice date becomes the tax point date.
Pushing the tax point into your next VAT period would result in a worthwhile cash flow benefit as the output tax could be deferred for up to 3 months.
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Businesses struggling in the current economic climate may find it harder to meet payment obligations. Consequently, a supplier who has already accounted for VAT to HMRC on a transaction will be at a cash flow disadvantage if its customer is slow to pay or does not pay at all. In these circumstances the supplier may claim bad debt relief, enabling it to obtain a refund of the output VAT paid over to HMRC on that supply, subject to certain conditions.
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Two or more bodies corporate may form a VAT group. There are numerous advantages to doing so, most notably the fact that intra-group supplies are ignored for VAT purposes. This would result in a large cash flow benefit or even an outright VAT saving if the recipient of the supply is not fully taxable for VAT purposes.
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Many businesses are now looking at ways to entice customers to away from their competitors. Business promotion schemes are an excellent way to do so but it is essential that VAT advice is sought at the time the scheme is devised. Numerous recent court cases demonstrate that, without full consideration of the VAT implications of the promotion, significant unexpected VAT costs can arise.
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In the current economic downturn, businesses may be looking to remove themselves from onerous contracts. To succeed, it is likely that a payment would need to be made to the other party to the contract. If the payment reflects the genuine loss to that other party through early termination it could be treated as compensation, with the result that no VAT is due by the recipient.
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Partly exempt businesses often continue to operate the standard recovery method or a historically-agreed special method without considering whether it still allows for a fair recovery of VAT incurred. We strongly recommend that you review your business activities to ensure that your business recovers all the input tax to which it is entitled.
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Following a landmark decision of the House of Lords, businesses are now entitled to submit claims to recover any VAT they have overpaid prior to 1997. Claims can even go back to the inception of VAT in 1973, if VAT was overpaid at that time. This is a real opportunity for businesses to obtain a windfall refund of VAT, potentially spanning 24 years, but claims must be submitted by 31 March 2009. A degree of estimation can be used where records are no longer available.
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Using our specialist software, Baker Tilly can help you sort and analyse large amounts of information, with a view to identifying potential VAT overpayments. Reasons for overpayment range from application of the incorrect VAT liability to a product through to transposition errors, which are all mistakes easily identifiable by the tool. The software can also be used to quantify potential accrual values and bad debt relief claims (see above), as well as exposing other problem areas such as internal fraud or duplicate payment of suppliers.