Two simple ways to make VAT radiate cash

Tuesday, November 22, 2011 | Posted by: Graham Brearley
Categories: Business advice, Economy, Tax | Tags: HMRC, VAT, Graham Brearley, exemptions, EU, cash flow, VAT accounting, VAT advice, cash, zero-rated, VAT reclaim, returns

Being a prudent Yorkshireman, I was reviewing my personal finances the other day and noticed the considerable hike in energy prices. After deciding to make sure that the Brearley household is sufficiently insulated and draught-proofed, I got to thinking about why businesses don’t apply some similar financial safeguarding to ensure their hard-earned cash doesn’t escape through the cracks. For example…

1. File monthly VAT returns?
For example, in my professional life as a VAT adviser, one of the things that I always find astonishing is how, in many cases, businesses do not pay much attention to the cash-flow impact of accounting for VAT. Maximising cash flow is a relatively simple thing to do, but if forgotten can result in unnecessary costs.

To illustrate: I have a client with two companies. Company A supplies goods to company B, which then exports the finished goods outside the EU. Putting company B onto monthly VAT returns meant that it now has the advantage of being able to claim the VAT charged by company A before company A has to pay it to HM Revenue & Customs.

It’s a simple solution, but very effective for repayment traders, ie, businesses which, because of the nature of their trade, always claim back more VAT than they pay (due to zero-rated sales such as exports). It works where no VAT is due on the sale, but the company is entitled to reclaim the VAT incurred on its costs.

2. Review supplier invoices for VAT exemptions
Similarly, where a business is partly exempt and cannot reclaim all of the VAT it incurs (or is an organisation involved in non-business activities), it always pays dividends to examine the purchase ledger regularly.

A review of supplier invoices will reveal whether VAT is being charged when it should not be, for example, because the purchase should be zero-rated or exempt for VAT purposes. Paying VAT when it is not due is a sure-fire way of unnecessarily reducing profits and being uncompetitive.

The above two examples are fairly simple ideas to implement. There are, of course, more complex solutions. What is clear is that payment of VAT need not be a burden, but can in fact work in a business’s favour if appropriate plans are put in place.

Managing VAT accounting should, in my view, be something that is done continuously and not only when times are hard.

Image: (CC) Images of Money / Tax Brackets

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