Unless you opt to register, or use, one of the available VAT special schemes, you are likely paying VAT to HMRC once a quarter based on the difference between the VAT added to your sales invoices less any VAT included in business purchases and expenses (including certain acquisitions of assets).
There is a problem with this option if you give credit to your customers – allow them to pay for any goods or services provided at some future date – and the amount owed by customers is more than the amount you owe to suppliers.
In this situation, you could be paying VAT added to your sales invoices, to HMRC, before you have received the cash from your customers.
Clearly this will have a negative impact on your cash flow.
To remedy this situation all you need to do is adopt the VAT Cash Accounting Scheme. Once adopted, your VAT returns will be based on the amount received from customers, less amounts paid to suppliers, rather than the invoiced amounts.
Not all businesses can use the scheme. To register, you must obviously be registered for VAT and your estimated taxable turnover will need to be under £1.35m in the next twelve month period.
And you will have to leave the Cash Accounting Scheme if your turnover rises to £1.6m or more.
Depending on the difference between your debtors (money due from customers) and monies owed to suppliers there is usually an initial boost to your cash flow in the first return you submit to HMRC.
If you are using the standard VAT scheme and would like to see if there would be an advantage in switching to the Cash Accounting Scheme, please call. We can take a look at your financial position in some detail and quantify the cash flow benefits. It really makes no sense to be paying out VAT to HMRC if the funds to pay this are still in your customers bank accounts.