It may seem an unlikely method of cashflow management; however how you manage your VAT liabilities could assist your monthly cashflow. During recent recessionary years small business owners have paid significant attention to managing their cashflow. It is important that the business survival techniques developed during the recent years continue to be implemented as businesses begin to grow and expand in the recovering economy.
We have reviewed how effective management of your VAT can assist your cashflow on an ongoing basis.
1. Paying VAT by Direct Debit
If you are registered for VAT you can avail of the direct debit scheme, on the basis that your bi-monthly VAT liabilities do not exceed €50,000 (€300,000 on an annual basis).
The benefit of paying by direct debit is that it allows you to spread the cost of your VAT liability throughout the year, rather than having to source finance to cover fluctuations on VAT liabilities on a bi-monthly basis. In addition, when paying by direct debit you will no longer be required to prepare and submit bi-monthly VAT 3 returns, as the Revenue Commissioners will only require you submit an annual VAT return.
If paying your VAT by direct debit you will be required to estimate the projected liability for the 12 months ahead with such an estimate divided by twelve to provide you with your monthly payments. It is important that you ensure the direct debits are sufficient to cover the annual liability as if the direct debit payments amount to less than 80% of your actual liability interest charges will be applicable and will be backdated to the midpoint of the year. In order to avoid interest charges you should review your VAT position on a regular basis to ensure your direct debits will be sufficient to cover your liability at the year end. If not, you should increase your direct debits to cover any shortfall.
2. Cash Receipts Basis of Accounting for VAT
When returning VAT under the invoice basis you become liable for VAT on the raising and issuing of an invoice to a customer. However, under the cash receipts basis VAT is not required to be returned to the Revenue Commissioners until such time as you are paid by the customer, which can have a significant positive impact on your cashflow.
Taking an example of an invoice which is raised on 31st October with a credit period of thirty days provided. In this example VAT would become payable under both the invoice and cash receipts basis as follows:
|Invoice Raised||Funds Received||Returned in VAT 3 Period||VAT Payment Due by|
|Invoice Basis||31st October||30th November||Sept/Oct VAT 3||19th November|
|Cash Receipts Basis||31st October||30th November||Nov/Dec VAT3||19th January|
You will note from the above that under the invoice basis you will be required to pay your VAT liability to the Revenue Commissioners before you have even received payment from your customer (i.e. VAT payment due by 19th November with payment received from your customer on 30th November). However, under the cash receipts basis your liability would not be due for payment until 19th January, which is after you have received payment from your customer.
3. Qualifying for Cash Receipts Basis of Accounting for VAT
In order to qualify for cash receipts basis of accounting for VAT one of the following criteria must be met:
- Turnover must not exceed €2,000,000
- At least 90% of your customers are not registered for VAT or not entitled to claim a full deduction of VAT (e.g. shops, restaurant, public houses and similar business providing goods or services to the general public).
4. Managing Cashflow through Invoice Basis of Accounting for VAT
If you do not qualify for cash receipts basis, you can still effectively manage your cashflow by managing the dates on which you issue invoices. Taking the above example, if the invoice was issued on 1st November instead of 31st October then the VAT would be required to be returned in your November/December VAT 3, which would not become payable until 19th January. In this instance, payment should be received from the customer by 1st December, thus ensuring you are in receipt of payment before the VAT is payable to the Revenue Commissioners.
If it is possible to issue an invoice one day later it can have a positive impact on your cashflow! However, be mindful not to push the issuing of invoices out too far as invoices must be issued within 15 days of the end of the month in which the goods or services are supplied.
5. Reduced Filing of VAT Returns
Most businesses, when first established, will be required to return their VAT on a bi-monthly basis. However, you can apply to the Revenue Commissioners to reduce the frequency of your VAT returns in the following circumstances:
- Businesses whose total annual VAT payment is less than €3,000 are eligible to file and pay VAT Returns on a six monthly basis.
- Businesses whose total annual VAT payment is between €3,001 and €14,401 are eligible to file and pay VAT Returns on a four monthly basis.
By reducing the frequency of returning your VAT you can reduce administrative costs, along with the number of payments required to be made to the Revenue Commissioners throughout the year.
Cash is King
If your business has survived the recent recession you will understand that businesses do not fail because they don’t have profits, they fail because they don’t have cash. We have assisted many of our clients in the last number of years in managing their cashflow which has supported in the survival of their business. As mentioned at the outset, it is important that business owners continue to use the skills and techniques which they have implemented in recent years, as such skills will be vital to their businesses future growth.
If you have any queries on the above or would like to discuss other cash management techniques, please do not hesitate to contact a member of our team.