How to use VAT to improve your cashflow

How to use VAT to improve your cashflow

Cashflow is a major issue in business. Even six and seven figure businesses can run into trouble if their cashflow isn’t managed properly. At first blush, VAT seems to be the enemy, but if you work it right you can actually improve your cashflow through a few canny VAT moves.

1. Negotiate

Ask for lenient terms with suppliers, ensuring you get as much time as possible to pay them.

2. Get paid fast

Always render your invoices in such a way that you are paid promptly by your client, but don’t need to pay the VAT on the invoice until the following quarter.

3. Investigate the alternatives

Paying VAT in and out based on invoices is the standard form of VAT accounting, but it’s not the only way. Look into the alternatives – flat rate, and cash accounting – and see which will work best for you and your business.

The flat rate VAT scheme is for businesses with a turnover of up to £150K. It can seriously simplify your VAT accounting, as it removes a large chunk of work, created by the need to prepare a quarterly VAT return. Instead, you pay on a set rate relevant to your sector of business. This is applied as a percentage to the whole quarter, saving time and money.

Cash accounting is for businesses with an estimated taxable turnover under £1.35 million. VAT is payable according to VAT received, as opposed to an invoices basis. This prevents you paying VAT on invoices yet to be paid, which is a huge boon for your cashflow.

4. Time your big spends

For large outlays, when you are spending big on a single purchase, make sure you time them right. Pay for the item immediately after the VAT return period.

It’s a daunting prospect, tackling your VAT accounting, but the more organised you are, and the more you plan ahead, the better off you will be in terms of tax and cashflow. It’s well worth investing the time, money, and effort in ensuring your VAT is structured to optimise your cash flow. Exactly how you do it will depend on your business, but there is always a way to get VAT working for you, rather than against you!

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