The big difference between VAT and Corporation Tax is that VAT can be actively (and legally) managed, whereas Corporation Tax is essentially one big bill, which gets delivered to companies every year. Hence, in the case of Corporation Tax, it’s a case of managing the payment rather than managing the tax itself.
VAT – Charge it and/or pay it only when necessary
This may sound like stating the obvious, but companies often tend to adopt a “play safe” approach to dealing with anything to do with tax and this can result in overpayments, which may or may not be recoverable and even if they are, you still have to claim the refund and wait for it to be processed. It can therefore be very worthwhile to bring in a VAT specialist to check that you are only paying VAT when it is actually necessary.
VAT – Pay slowly, reclaim quickly
That is the essence of VAT management in four words.
Pay slowly
Staying within the framework of the time-of-supply rules, look at how you manage your invoicing to keep your VAT payments as manageable as possible. We’d like to emphasise that this exercise has really nothing to do with lowering your VAT payments (that was the previous step), it’s about giving yourself as much breathing space as possible to manage your payments as best suits you. For example, if you are currently invoicing on the last day of each month and you offer 6-week payment terms (or longer), then you are basically setting up a situation where your VAT bill is due before your clients have actually paid the invoices. There are various ways you can manage this and they can be used individually or together. For example:
You could change to invoicing at the start of the month. This would “push back” some of your invoices into the next VAT billing period, meaning that the client will have paid by the time your VAT is due.
You could change your payment terms, or at least sweeten the deal for quicker payment.
Obviously both of these solutions bring challenges as well as benefits and there may be (many) other possibilities. The basic point, however, is that as a minimum you absolutely must keep track of your VAT payable and ideally you should look for ways to manage it so it has minimum impact to your cashflow. You can then use VAT loans to fill in the gaps so to speak and you’ll be able to go to your finance company with a much better idea of what you need and want, meaning that they’ll be in a much better position to help you.
Recover quickly
Generally speaking as soon as you have a valid VAT invoice, you can recover VAT regardless of whether or not you have yet paid the supplier. Basically the VAT has been paid so you’re due a refund regardless of whether or not the supplier’s invoice is correct. Depending on your software solution, this may mean putting in a manual process to set the VAT recovery wheels in motion before the invoice has gone through the full control process.
Likewise, you may find it educational to initiate a process which flags up invoices which have been entered gross, i.e. without a VAT allowance and to investigate them further. This may be a case of straightforward human error (everybody makes mistakes), but it can also be a sign that staff in finance are unclear about whether or not an invoice qualifies for VAT recovery. In this case, you need to determine whether your staff need better training or whether your supplier needs to provide better invoices (or whether you need a new supplier).
Put finance to good use
HMRC are hardly known for their flexibility and to be fair tax obligations are a fact of business (and life in general) so it makes sense to treat them as a reality and manage them. Using finance for VAT and Corporation Tax is an affordable way to keep cash flow running smoothly. Ideally you would like to use finance as part of a corporate plan, but in a pinch it can also help with the unexpected.
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