Tax expert Kevin Hall explains how VAT can improve cash flow
In these uncertain times, you'll be looking to do all you can to lessen the economic and financial impact of Covid-19 on your business. Sensible and appropriate VAT planning can help improve much-needed cash flow.
In this article, I will take a look at how you may be able to claw back VAT from HMRC; or not account for VAT on certain transactions in the first place; and what you can do to reduce your payments to HMRC now.
Claim money back from HMRC
1. Bad debt relief
Bad debt relief is the mechanism through which a business claws back from HMRC the VAT paid to HMRC by the taxpayer in its VAT returns where the customer has not paid an outstanding debt for six months.
The process for claiming VAT bad debt relief is automatic and does not require a separate election or claim to HMRC. However, it will require a review of your bad debts to ensure they meet all the conditions before recording the relief in your VAT return.
Are there any claims that the business could make? For example, services such as financial or insurance brokering and intermediary work are often exempt, meaning that VAT on attributable costs cannot be recovered. It is important to minimise VAT on costs, and there has recently been a change in the rate of VAT on the purchase of e-publications.
Officially this change took effect from 1 May 2020, but a recent case was won against HMRC on this very point on Christmas Eve 2019 and businesses should be making claims for VAT paid in the past four years. It is important to protect your position as soon as possible as time limits could reduce the claims if not submitted promptly.
3. Challenge HMRC decisions
It may seem obvious to say, but HMRC are not always quite correct, and where a taxpayer doesn't feel the written guidance is right, or disagrees with what HMRC says during an inspection or an assessment raised, HMRC decisions should be challenged.
HMRC's view is just that, their view of the legislation, and so should be challenged when there is disagreement. It may be vital in fact for your business as a successful challenge will improve cash flow and profits. A VAT specialist such as Markel Tax can assist with anything from putting an argument direct to HMRC, to submitting an appeal to Tribunal, including assistance with Alternative Dispute Resolution (ADR, an internal HMRC dispute process).
4. Get repayment returns in early
Another fairly obvious but often overlooked point is to get your VAT returns in as early as possible where the VAT return is a net repayment in favour of the taxpayer. This is more likely to be the case if sales have dropped off as a result of the economic downturn and, by submitting as soon as possible, you are more likely to receive a faster repayment.
Don't account for VAT now
VAT is constantly evolving, so do keep in touch with your tax adviser. For example, in addition to the elimination of VAT on the purchase of e-publications, the government announced a few weeks ago that VAT would be removed from certain goods used in the Covid-19 fight (some for import, others upon sale). This step should be applauded by the nation.
Don't make VAT payments now
• Partial exemption (explanation below) - IFAs and brokers are required to determine whether their supplies are exempt or subject to VAT, and how VAT is applied when the customer receives a mixture of both. This can be a difficult area requiring advice. At present, an adviser might be suggesting that, if taxable sales have dropped (as is likely at present) this could adversely affect an IFA or broker's ability to recover VAT and worsen cash flow. A review is required as to whether a "special method" should be agreed with HMRC.
• VAT deferral - You don't need to make a payment to HMRC for your normal VAT return payment that falls between 20 March 2020 and 30 June 2020. The payment can automatically be deferred to 31 March 2021, but do cancel direct debits for VAT return liability deferral as HMRC cannot do this themselves.
• Payments on account (POA) If you make POAs to HMRC, consider contacting HMRC to cancel or reduce these as they may now be too high and could create cash flow problems in the months ahead.
• Accelerated or deferred tax points - can invoices be issued later or earlier to improve cash flow for the business?
• Import VAT - There are separate arrangements for Import VAT payment deferrals, but apply to HMRC for prior approval.
• ‘Time To Pay' - Arrangements can often be made with HMRC to agree a plan for VAT liabilities to be paid off over a longer period of time. HMRC have been instructed by the government to relax such arrangements at the moment.
Partial exemption - explanation
Some businesses make both taxable and exempt supplies (partial exemption) and incur VAT on costs that cannot be attributed directly to either taxable supplies (eg advice) or to exempt supplies (eg brokering).
This VAT is called "residual input tax" and an apportionment, known as the partial exemption calculation, must be performed to determine how much of this is recoverable (Regulation 101(d), Value Added Tax Regulations 1995).
Kevin Hall is associate director at Markel Tax