Business Cash Flow and VAT in the UK

Mariusz owns a small business that was struggling with cash flow due to VAT payments. He was looking for a way to improve the situation and decided to try changing his invoicing method. So, he contacted TaxOne's accounting department.

How does the system operate on a cash basis?

One of the solutions we considered was the possibility of using an accounting system based on cash basis (CAS). In this scenario, Mariusz would not account for VAT on sales until his customers paid.

He also wouldn't account for VAT on purchases until he himself paid his suppliers. Unfortunately, this method isn't effective when customers delay payments.

Furthermore, it turned out that Mariusz was no longer eligible for CAS because his annual VAT-inclusive turnover exceeded £1.35 million.

Delaying VAT payments

We began considering other options, depending on whether the sale was for ongoing services or a one-off transaction.

Delaying VAT for ongoing sales

For ongoing sales and periodically issued invoices, you can use the option of delaying the issuance of VAT invoices until payment is received. In such cases, a substitute document is issued to inform customers of the amount due, such as a pro formainvoice, payment application, or demand for payment.

The actual sales invoice is issued and accounted for only when payment has been made by the customer. In such cases, however, it's important to maintain a full audit trail for the documents issued, for example, by assigning each invoice pro forma a unique and sequential identification number. 

VAT Deferral for One-Off Sales

Delaying the issuance of VAT invoices is also possible for contracts with one-off payments: a "payment request" or another document can be issued instead of a sales invoice, deferring the issuance of the actual VAT invoice to the next accounting period. However, in such cases, the invoice date cannot exceed 14 days from the completion of services or sale.

The downside of this solution is that some clients might perceive such actions as a lack of trust, which could negatively impact their cooperation with the company.

How to Utilize VAT Payment Deferral

The ability to defer VAT payments can help Mariusz's company's financial liquidity by managing it so that payments fall due when the company generates higher revenues. During periods of low business activity, it's better not to have additional financial burdens.

Verifying a Company's Financial Liquidity

To verify his company's financial liquidity, Mariusz also had to consider other aspects of his business:

• How much debt does the company have, and does its debt level lead to financial difficulties?
• Is cash easily accessible if needed?
• Are there any signs that the company's assets are not being utilized effectively?
• What revenue does the company generate?
• How highly is the company valued by investors?
• Are investor expectations justified?

After analyzing all these aspects, Mariusz was able to better understand his company's situation and take appropriate steps to improve its financial liquidity. 

You can find additional information on financial liquidity in our other article, which you can find here.