Late payments create cash flow problems for small businesses and this can lead to debts with HM Revenue & Customs. According to the latest figures, VAT arrears are currently £2.58 billion.
Most companies pay VAT on the basis of the bills they have issued to customers less the purchases they have made from suppliers and so late payments can have serious consequences for both the business and the Exchequer.
If you are a small business you may be able to use the cash accounting scheme for VAT. This will give you automatic relief for slow payments as your VAT return will be based on cash receipts less cash payments.
How do you qualify?
In order to use the scheme your business must have an expected turnover of £1,350,000 (limit set from 1 April 2007). This turnover should include all sales/supplies with the exception of exempt supplies.
You do not need to apply to HMRC to use the scheme. Be careful in the initial few months as some sales and purchases will have been included in your VAT returns on an invoice issued basis and you don’t want to include them again when you receive or pay the cash.
What about Contractors?
Contractors will probably be on the VAT Flat Rate Scheme and the cash basis cannot be used with this scheme; it is unusual for contractors to have late payment issues as their agencies will pay within a week of receiving the timesheet or invoice.
If you would like more help with your VAT and changing between schemes – please call Clearways Accountants on 01737 244298.