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21st November 2022

Partner Insight: Top Tips to ensure VAT improves your business’s finances

Right Tax – Right Time

The 17th November’s Autumn Statement brought no significant changes on VAT to report. We feel it’s vital, therefore, to remind all VAT registered bodies that there are steps you can take to ease VAT burdens and improve your cashflow, even if the Chancellor has offered no reliefs. These are obviously difficult times for the economy. It is important that only the correct amount of VAT is paid at the right time and that all available VAT reliefs are identified. The very nature of VAT is that it is a ‘now’ tax – VAT liabilities arise when supplies are made rather than when annual accounts are completed at the end of the financial year – so the benefit of adopting VAT-efficient practices is often immediate. So, what can be done?

We set out below some of the areas that we recommend should be examined by any VAT registered entity seeking to improve VAT cashflow, minimise VAT costs and be as VAT efficient as possible.

Bad debt relief

Where VAT has been accounted for on taxable supplies made to customers, and customers have yet to pay for those supplies within 6 months, suppliers can claim relief for the outstanding VAT. The debt must be written off first, but this ‘write off’ need only be for the purpose of claiming this bad debt relief, and the supplier can continue to pursue the debt as normal. If payment is later received, the VAT relief claimed earlier must then be adjusted.

Top Tip – review outstanding payments from customers and consider making a claim for bad debt relief as soon as possible.

VAT Input Tax being claimed late or tied up in the system?

In most cases, VAT incurred on expenditure is reclaimable when adequate evidence of the purchase (typically a VAT invoice) is on hand. The complexity of Accounts Payable (AP) systems and the increasing need for diligence when identifying reclaimable VAT input tax, can lead to delays such that VAT is often reclaimed in later tax periods than it legitimately could have been.
Where it is possible to estimate the value of VAT delayed in this way, legislation allows for VAT registered entities to increase the value of input tax they reclaim each period in recognition of these delays. Prior agreement with HMRC is usually required.

Top Tip – consider how much VAT is reclaimed on invoices which are dated in previous tax periods. This will indicate the value of VAT claimed late, which might be uplifted in future tax periods.

Services – consider sending Requests For Payment rather than invoices

VAT output tax must be accounted for according to the relevant tax point. Regulations direct where and when tax invoices should be raised and when the associated VAT must be declared. Typically, VAT must be declared when payment is received from a customer, or when a tax invoice is issued. But the rules allow some room to manoeuvre. For instance, where the supplies are ongoing services (rather than goods) it is accepted practice to issue requests for payments rather than formal VAT invoices, and in doing so, delay the tax point until payment is received. There may be implications for accounting purposes, but the benefits of delaying tax points to a subsequent tax period, AND removing the risk of VAT bad debts arising, could make it worthwhile.

Top Tip – Review the type of supplies made and consider changing invoicing practices where VAT cashflow can be improved.

Timing sales invoices to improve VAT cashflow

Generally, VAT output tax must be declared in the tax period during which a sales invoice is issued. Invoices issued at the beginning of tax periods have a better chance of being paid before the VAT output tax must be declared, but VAT on invoices issued at the end of tax periods is almost always ‘paid’ to HMRC long before payment is received from the customer. Timing the issue of sales invoices can improve VAT cashflow.

Top Tip – Examine the timing of issuing sales invoices. Where possible, change issue dates of invoices raised at month end to better manage VAT cashflow.

Examine property holdings/occupation and consider the pros and cons of any VAT options taken

Supplies of property interests are the only supplies that can be altered from exempt to taxable by the supplier. The benefit of opting to tax a property in this way is that VAT incurred on attributable expenditure will become reclaimable (subject to various conditions). VAT options may be taken at any time.

Top Tip – review property interests and consider whether opting to tax previously un-opted properties can improve VAT recovery.

Another feature of the world of VAT property options, is that property owners are prevented from opting interests where they are occupied for certain charitable or residential purposes.

Top Tip – examine the VAT treatment of rental costs and consider whether VAT has been applied incorrectly.

Staff expenses – has all reclaimable VAT been identified?

The rules around VAT recovery on staff expenses are convoluted and often difficult to manage – even where proprietary software is used. It is not uncommon, therefore, for this VAT to be unidentified and underclaimed. Depending on the reason for underclaiming VAT previously, it may be possible to submit claims for staff expenses over the last four years.

Top Tip – review staff expenses procedures and consider the potential for making retrospective VAT claims. Also, consider improvements to relevant systems to maximise VAT recovery in the future.

Review partial exemption special methods

The suitability of a method may change over time and may cease to provide optimal VAT recovery when business activities evolve. Methods should, ideally, be reviewed frequently (and certainly as often as a special method agreement requires) but this is often postponed on the belief that any changes are unlikely to be significant. This is not necessarily the case.

Top Tip– Examine the requirements of current methods and where they allow, review their suitability, and consider amending.

Review VAT and energy costs

Energy costs are rising and so is the 20% VAT charged on top. The 5% reduced rate of VAT is applicable to supplies of domestic and certain residential and charitable consumers, but qualifying use often requires the consumer to prove eligibility to the supplier. In buildings where qualifying use exceeds 60%, the entire supply can attract the reduced rate.

Top Tip – review energy contracts, billing arrangements and energy consumption rates to identify and maximise the potential for energy attracting the reduced rate of VAT. Focus on historic changes of suppliers to make sure that new suppliers were provided with proof of eligibility and that they applied the reduced rate accordingly.

Revisit M&A / transaction costs for VAT recovery

Transactions involve costs that are out of the ordinary for most businesses. Dealings in shares are financial instruments that are often exempt from VAT, while certain types of business transfers are outside the scope of VAT. VAT case law abounds. The fact that these activities are unusual for most, means that they often receive a good deal of attention, including their VAT treatment. But case law continues to develop and alter the liability of some supplies or change the level of VAT that is reclaimable on associated costs. Also, the costs arising can be very substantial.

Top Tip – Revisit any transaction (acquisitions or disposals) over the past 4 years and review the potential for improving VAT recovery/treatment.

VAT grouping

VAT group registrations have pros and cons. Among the pros is the fact that transactions between VAT grouped companies are outside the scope of VAT, effectively removing the risk of irrecoverable VAT arising on intra- group supplies. HMRC have the powers to combat VAT cashflow planning using VAT groups, but where there are other legitimate reasons for VAT grouping, it is unlikely that these powers would be used.

Top Tip – Corporate groups should revisit their VAT group structures and consider whether they provide the VAT efficiencies that they once did. Changes can be made prospectively.

Overseas costs – has VAT been reclaimed where possible?

Many countries around the world have VAT regimes – all EU countries are obliged to have VAT regimes based on EU Directives. The UK has treaties with most other countries operating VAT systems, and we have reciprocal arrangements to refund VAT incurred by overseas businesses. Various rules apply, of course, and retrospective claims are limited to specified timeframes, nevertheless, refunds are generally available.

Top Tip – look at historic and ongoing overseas costs with a view to identifying where overseas VAT has been incurred, the evidence on hand and the scope for making claims.

Whatever the nature of your activities our expert team can help you ensure that you’re making the best use of the VAT regulations in these challenging times. If you are interested to know more about how VAT or environmental tax impacts your organisation, please get in touch with your usual Centurion VAT contact or contact the team at emailus@centurionvat.com.

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