Being aware of how much the quarterly VAT payment could be will help to ensure that the cost can be accommodated as soon as the bill arrives. But what happens if a business doesn’t have the foresight to anticipate the payment required and ultimately struggles to pay?
With potentially flexible payment dates and various schemes to alleviate the pressure of VAT payment requirements, there are ways for companies to manage their cash flow while also abiding by tax rules.
Although it’s not essential for businesses that turnover less than £82,000 a year to register for VAT, those that do earn over this amount must be VAT-registered.
When faced with cash flow problems, it can be difficult for promising companies to reach their potential. The government has recognised this issue and has introduced a number of schemes available to make it easier to pay VAT:
Flat Rate VAT Accounting Scheme
The Flat Rate Scheme could help SMEs reduce the amount of time they spend on paperwork and admin. Rather than calculating the VAT on each and every transaction, this allows companies to simply pay a flat rate percentage of the turnover as VAT.
This could also make it easier for small businesses to predict how much of their takings need to be paid to HM Revenue and Customs (HMRC). However, those that purchase a lot of goods and services from VAT-registered business may have to pay more VAT.
VAT Cash Accounting Scheme
By signing up to the Cash Accounting Scheme, SMEs won’t have to pay VAT until customers have paid the money they owe. While this could help to minimise the impact of late payments, the business will not be able to reclaim VAT on purchases until suppliers have also been paid.
Annual Accounting Scheme
Typically, VAT periods are quarterly, but for some businesses it may be possible to ask HMRC for more flexibility.
The Annual Accounting Scheme allows businesses to choose between submitting just one return each year and making advanced VAT payments based on their last or estimated return. Some businesses, such as those subject to seasonal fluctuations, may find that this enables them to improve cash flow within the company.
This may also help by reducing the amount of paperwork required, as returns can become less frequent.
Businesses that regularly reclaim VAT may not be well suited to this option, as they’ll only receive one payment annually.
VAT Margin Schemes
For companies that buy or sell second-hand goods, works of art, antiques or collectibles, VAT margin schemes reduce the amount of VAT payable.
Firms are taxed the difference between the amount they paid for an item and how much it was sold for, meaning they will pay the tax on a much smaller figure.
By making use of suitable VAT schemes, SMEs could save time and free up much-needed cash to be used elsewhere in the business.
How to avoid late payments
With so many pressures associated with running a business, it’s no surprise that some companies can have problems paying VAT, particularly when faced with late payments from their own customers.
Businesses must address any VAT payment problems they have as soon as possible by contacting HMRC.
The company may be offered more time and could be given the opportunity to pay the late VAT return in more manageable chunks, rather than one large payment.
However, while HMRC may be able to assist, late payments are likely to be met with surcharges.
Freeing up cash flow
Although HMRC are often willing to assist businesses to make it easier to pay VAT, cash flow problems may still occur.
When faced with larger than expected VAT bills, companies may find comfort in alternative finance solutions such as factoring and invoice discounting. Both options could help SMEs to balance VAT payments and ensure working capital isn’t drastically affected.
To learn more about how invoice finance can help to unlock capital and improve cash flow, please don’t hesitate to get in touch with Aldermore.
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