Can we help with your cash flow?

There is no longer any doubt, we are now headlong into a recession. Now the frightening speculation has turned to “are we entering a depression?”.

It’s as if someone had pushed a button and notched up the incline on the jogging
machine – all of a sudden more effort is required to sustain forward
momentum.So how can we help?

Firstly, the banks are still able to fund good business proposals. Obviously its harder than it used to be, so if you do have  a proposal, we can help to ensure you have a first rate business plan with integrated cash flow forecast.

It’s worth looking at VAT strategies that are available to slow down payments to the taxman.

It’s beyond the scope of this article to give detailed advice, as each business will have different needs. What we have done is outline in general terms some of the strategies that are available – if we have not reviewed your tax affairs recently do call and make an appointment.

VAT

The legislation that sets out the way in which you calculate the VAT to pay each quarter offers a number of opportunities to ease cash flow.

    * Cash Accounting – if your VATable turnover is under £1.35m and you are not using cash accounting, now would be a good time to switch. A few companies will not benefit, especially if you are paid for the goods or services you sell at point of sale, a retailer for instance. If you sell goods on credit and you are usually owed more than you owe (to suppliers etc) cash accounting would probably reduce at least the first payment you make when you join the scheme. Essentially you only pay VAT when it is collected from customers. Outputs and inputs are based on monies received and paid, rather than amounts invoiced.
    * Flat rate scheme – another of the special schemes offered to small businesses is the flat rate scheme. If your turnover is under £150,000 and you have small amounts of input tax to reclaim each month, this scheme may increase your retained profits. Each business sector suffers a different rate of VAT so the only way to see if this scheme would be beneficial is to crunch the numbers.

Even if you don’t qualify for a special scheme, don’t forget to claim bad debt relief. Any debt that is over 6 months old qualifies as a bad debt and you can reclaim the output tax you will have paid. (Note: the flip side also applies. If you have invoices unpaid from your suppliers more than 6 months old, you should repay any input tax you have claimed!)

It is also worth filing your VAT return online. You are given an extra 7 days to file the return and if you pay your VAT by direct debit the payment will not appear on your bank account for a further three days.

Making losses, or less profit.

One of the more obvious effects of recession is a downward trend in profit creation, and if your business is badly affected, making losses. The notes that follow set out a few ideas for capitalising on the tax planning opportunities this affords.

   1. Self assessment payments on account – if your current years profit is likely to be lower than the previous year, you may be able to elect to reduce the payments on account for the current year. The claim should be based on realistic trading results.
   2. Losses – if your business is currently making losses it may be possible to carry these losses back to previous years, when you may have paid significant tax. Any tax overpaid as a result can be reclaimed.
   3. Change of accounting date – in some circumstances it may be beneficial to either extend or reduce a company’s accounting period end to make use of a fall off in profitability. There are limitations to this type of planning so careful consideration of the facts is required.

Need more time to pay

Generally speaking if you are late paying your tax or VAT, interest and in some cases penalties will be applied. If you can justify the reasons for your inability to pay it is usually advisable to contact HMRC and agree a payment timetable that your cash flow can afford. Burying your head in the sand is not a useful strategy!

If your business is starting to feel the pinch, pressure on profits and cash flow, do keep in touch. As mentioned at the beginning of this article each business is unique and there are a number of strategies we have not had the space to showcase in this article. Please call if you need help.

VAT Cash Accounting

We seem to be entering a period when banks are likely to have less money to lend, and when they do lend interest rates charged will be “realistic”. The self styled liquidity crisis is with us!

Consequently the management of your cash resources will be critical in the coming months as businesses chase liquidity by tightening up on their credit control. This process will of course be frustrated as creditors hang on to cash reserves by extending the credit they take from suppliers.

If your business qualifies, and you are not already using the scheme, the VAT Cash Accounting scheme could be a lifesaver.

What are the rules of the cash accounting scheme?

  • VAT is accounted for on a payments basis i.e. output tax due on date of payment from a customer; input tax can be claimed when a supplier is paid
  • available to any business with annual taxable sales of £1.35m or less (zero-rated sales are still taxable but exempt sales are not; exclude any sales of capital assets)
  • no application form needed to join the scheme – can be adopted by an eligible business at the beginning of any VAT period
  • before adopting the scheme, a business must ensure it is up-to-date with its VAT returns and payments.

What are the advantages of using the cash accounting scheme?

  • automatic bad debt relief – because output tax is never declared until a payment is made by the customer
  • cash flow benefits by delaying payment of output tax from invoice date until payment is made by a customer
  • simplified record keeping – VAT can be accounted for through a cash book – no need for separate sales/purchase day books
  • the scheme is of particular benefit (for cash flow purposes) to a business that gives extended credit terms to its customers in relation to standard rated sales

What are the disadvantages of using the cash accounting scheme?

  • input tax cannot be claimed until payment is made to a supplier
  • the scheme will not benefit a business where most/all sales are zero-rated e.g. a milkman
  • the scheme will not benefit a business where sales are paid for, either in advance of invoicing, or at the same time a sales invoice is raised

How does a business apply to join the cash accounting scheme?

  • there is no requirement to notify HMRC in advance of using the scheme
  • scheme can be adopted by any eligible user (i.e. taxable sales of £1.35m or less) at the beginning of any VAT period
  • the scheme can only be used from a current VAT period i.e. no retrospective use

Will HMRC ever prevent a business from using the scheme?

  • as long as a business is up-to-date with its VAT returns and payments, and has not been convicted of a VAT offence within the last 12 months, then use of the scheme will always be allowed
  • a business must withdraw from the scheme if its taxable sales exceed £1.6m per year (VAT exclusive)

At what point may or must a business leave the scheme?

  • a business can voluntarily withdraw from the scheme at the end of any VAT period
  • a business must withdraw from the scheme if the value of its taxable supplies has exceeded £1.6m per annum
  • HMRC has the power to impose compulsory withdrawal in order to protect the tax yield

If you would like us to check out the viability of Cash Accounting for your business, please call.