VAT Planning for recessionary markets

October 2008

As the economic downturn intensifies we have set out below a few VAT planning strategies that you might like to consider.

Bad debt relief. Any debts unpaid after 6 months can be written back for VAT purposes. If you are in the VAT cash accounting scheme you automatically get bad debt relief as you only pay over output tax when you are paid.
Cash Accounting. If the amount that is owed to you by customers is generally more than the amount you owe your suppliers; and if your turnover is under £1.35m, you may be advised to take a look at cash accounting for VAT. Under this scheme you only pay VAT added to your sales and deduct VAT added to your purchases, when the money is received or paid from your bank account. If your debtors are significant this may create a substantial initial boost to your cash flow when you first join the scheme.
Requests for payment. If you invoice for services on a continuing, contracted basis, it may be possible for you to issue a request for payment rather than an invoice. When the payment is received you can issue a proper tax invoice on the same day. The tax point in these circumstances is taken to be the date of payment. This is a common arrangement in the construction industry.
Handling late payment. There is nearly always a penalty cost if you are late paying your VAT. The penalty charge is between 2% and 15% of the unpaid VAT, depending on how often you fail to pay on time in one year. Always let HMRC know if you cannot meet your VAT payment on time.
Deregistration. If your VATable annual sales are likely to drop below the current deregistration limit, £65,000, you could consider deregistration. You must take into account VAT that you will need to pay back on stock as this may affect your decision.

If you would like to discuss any of these topics, or indeed any other issues that concern you regarding the current downturn in the economy, please call.