How the right VAT scheme could positively impact your cash flow
Small businesses have a number of VAT schemes available which could be beneficial to you - depending upon the type and turnover of your business. We will today discuss the possible effect VAT cash accounting scheme could have on your business.
If the VAT exclusive turnover is £1.35 million or less than, you could account and pay for VAT on the basis of cash received and paid. This means that you do not have to pay VAT to HMRC on invoices that have not been paid and will not be able to claim VAT on expenses you have incurred but not paid yet.
I will use an example to demonstrate this:
You are using standard VAT scheme and the VAT quarter is 1st January 2013 – 31st March 2013. You have invoiced £500,000 plus VAT of £100,000 to your customers on 1st of February 2013. The VAT of £100,000 will need to be paid and cleared in to HMRC account by 7th of May 2013 (online filing and payment deadline for 31 March 2013 quarter). However, for any reason (financial difficulties, more than 90 days payment terms etc.), half of your customers will not be able to pay you till 30th of June 2013. This means that you will pay £50,000 worth of VAT from your own cash flow on the 7th of May 2013.
In comparison, if you were using a cash accounting scheme then you would have only paid £50,000 VAT, which was received while the remaining £50,000 - which was paid on 30th of June 2013 - would have been paid by 7th of August 2013.
The effect of £50,000 could have a drastic effect on your cash flow and can be enough to bring some businesses down if they do not have sufficient cash flow to pay this or an overdraft facility (an overdraft will also incur in extra interest).
So the question is, ‘Are you using the correct VAT scheme?’
Please note: This does not constitute as tax advice. Professional advice must be sought before any tax planning. The tax planning may differ based on your individual circumstances.
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