Improving cashflow for the construction sector – VAT
During the COVID-19 pandemic, the inability to work on site is having a massive cashflow implication for all businesses in the construction sector.
As discussed in our previous article, Research & Development (R&D) tax credits can increase cash inflow however there are also various VAT relief options.
The Governments VAT deferral scheme supports those affected by the COVID-19 pandemic by deferring VAT for all businesses and self assessment payments for six months until 31 March 2021. For those who submit four VAT returns a year that included a summary of your input and output VAT for that trading quarter, you can switch them to monthly VAT returns. If you pay monthly, you’ll have to find 10% of your estimated VAT bill at each deadline whereas for quarterly payers, it’s 25%.
For those who submit quarterly VAT returns, you could look at your VAT position over the next few months and consider whether switching to monthly VAT returns would be beneficial by bringing forward any VAT repayments. You may have very little income over the next few months, but still incurring vatable supplies.
If your business makes VAT payments on account (where your annual net VAT payable is over £2.3m), you can request HMRC reduce the payments if you expect your VAT liability will be at least 20% lower in the next payment on account year.
Bad debt relief allows a business to claim back VAT on unpaid sales invoices from their customers that are six months overdue. A refund can only be claimed when all the conditions are met from the date the debt was due rather than the invoice date. You can tie this in with the monthly VAT returns noted above.
If your jobs are continuous, you can introduce a “Request for Payment” rather than an invoice for those jobs, which can be useful, as it will delay the VAT until the payment is received from the customer. The Request for Payment invoicing creates an automatic bad debt relief for the VAT accounted for on the invoices issued, meaning you won’t need to wait for 6 months as noted above under the formal bad debt relief rules.
Reviewing how your company pays invoices could have a significant impact on cashflow. Suppliers should benefit from HMRC’s deferral of VAT to 31 March 2021, so could you pay the supplier the net now and the VAT element at a later date.
If your business has turnover of less than £1.35m, can you switch to Cash Accounting which allows you to only pay VAT when you receive the cash from your customers, rather than on the date you issue the VAT invoice. This also means that you reclaim VAT on your purchases when you have paid your supplier, rather than on the date of the invoice.
The timing of invoices can have a significant impact on your VAT liability. Bringing forward or moving back the date of sales invoices may move the invoices in to different VAT quarters and therefore have a cash impact.
If you would like to discuss any of the issues listed above or have any other questions regarding VAT, please contact our VAT Taxperts.