“Cash is king” – This saying has never been more relevant to businesses than these uncertain times. COVID-19 is affecting business in ways no one thought possible. In order to free yourself from the burden of cash-flow worry, we’re trying to do our bit to advise you on ways you can inject some income into your bottom line. Together with our partners DLA Piper, we have put together a series of VAT cash-flow tips that will hopefully allow you to take control of something that is within easy reach – VAT.
Tip 1: Delaying the Time when VAT must be Accounted for on Supplies
The time of supply (tax point) can vary between the date of invoice, receipt of payment, and when the goods or services are provided, although there are some special rules to deal with continuous supplies of services and other particular situations. Many businesses first provide their customers with a VAT invoice before providing goods or services and await payment. This simplifies administration.
In such cases, the time of supply can be accelerated to the date of the invoice. Businesses may be left waiting for payment between 2 weeks to 60 days. However, businesses still have to account for VAT on their supplies to HMRC. When customers delay making payment, the supplier is at risk.
To improve cash-flow, businesses should avoid issuing a VAT invoice until necessary as this can accelerate the time of supply. This can be achieved by preparing a payment request/demand which confirms that a VAT invoice will be provided upon payment. It is best practice to add on the face of the demand “This is not a VAT invoice”. Doing this can achieve a VAT cash-flow advantage of up to 4 months. The UK, as well as many other jurisdictions, have deferred the date when output VAT is due for a period. Please see below. But deferring the time of supply by this simple practice is recommended in any event.
For connected companies, beware the rule there is sometimes a deemed supply every 12 months, even in the absence of an invoice or payment.
Tip 2: VAT Bad Debt Relief (BDR)
The VAT Directive allows Member States to implement a BDR relief scheme. In principle, businesses may be able to recover output VAT already paid to tax authorities in respect of supplies, when the customer fails to pay in full. Claiming BDR is relatively simple but is subject to meeting the specific local requirements of the jurisdiction.
VAT Tip 3: Deferring VAT payments
Governments across Europe have set out measures to assist businesses which include the deferral of VAT payments without interest and/or penalties. Each country has its own measures in place and are being revisited. Businesses are advised to continually monitor their own government announcements in their local jurisdictions. You can view our comprehensive global vat changes tracker here. We collated every country’s VAT deferment procedures for COVID-19. This will help you get even more insight into some favourable COVID-19 VAT cash-flow tips.
We hope these VAT cash-flow tips will give you some clear guidance during these unprecedented times. We believe that VAT can be an effective liquidity booster for businesses if you know how to use the mechanisms in your favour. If you wish to explore any opportunities available to your business or if you simply have any queries around indirect taxes, please get in touch with us by completing our contact form or emailing firstname.lastname@example.org.
Content provided by Richard Woolich, Partner, DLA Piper
Watch this space for part 2 of our VAT cash-flow tips series together with DLA Piper.