Help ease your VAT cash flow

This piece looks at the solutions available to the age old problem of cash flow and how they can be used to alleviate the burden on your business.

VAT and cash flow

As a VAT registered business you may be familiar with the situation of slow paying customers and the cash burden on your VAT bill. The simple way to alleviate the cash burden is to use the cash accounting scheme. However, if your business does not meet the conditions for this scheme there may another solution to help ease the cash flow burden.

Tax Points

A tax point is the date a transaction takes place for VAT purposes and the rules vary. Usually, the tax point for VAT is the earlier of the date that you make the supply; issue an invoice if it’s within 14 days of the supply; or when you receive payment.

Continuous supplies of services

A continuous supply is one that involves an open-ended contract. One-off service spread over a long period are not a continuous supply. For example, an IT consultant who’s been contracted to set up a computer system isn’t making a continuous supply, even if it takes a year, because once the job is done the contract ends. The same work would be part of a continuous supply if it were just part of an open-ended contract to supply IT support.

Revised VAT point

With a supply of continuous services the tax point occurs on the earliest of the issue of a VAT invoice and when payment is received. If the payment is received without issuing an invoice the VAT is delayed until you get paid and thus eliminating the cash flow issue around VAT. 

Get the paperwork right

The request for payment mustn’t show your VAT number or an amount of VAT. It would be prudent to include the wording “This is not a VAT invoice”.

AJN Accountants are specialists in helping contractors, freelancers and small businesses to save tax and time.

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