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Smoothing out the VAT cycle

The January cashflow challenge of having a slow December.

Paul Surtees Jan 07, 2020

Paying their VAT bill won’t be top of most clients’ strategic to-do list when it comes to planning, long-term financial goals or conversations with you – their trusted accountant and adviser. But with Christmas now behind us, timely VAT advice can actually be a real life-saver for cash-poor business to business (B2B) clients.


Slow Christmas trading and the pressure of tax bills

December trading makes for a slow month for many businesses – particularly for B2B companies that don’t have the seasonal peak of consumer-driven Christmas sales to offset this December downturn in sales, income and quarterly profits.  

Clients that experienced this seasonal dip will have less revenue coming in but will, typically, have the same outgoings. So, there’s less cash in the pot to cover salaries, rent and other operational overheads incurred by the business, resulting in a tough few months ahead. 

This slowdown in revenue can have serious repercussions on the client’s ability to pay their upcoming corporation tax (CT) and value-added tax (VAT) bills.


CT and VAT cycle


The chart below illustrates the regular annual CT and quarterly VAT cycles across the year for the majority of SMEs paying on a quarterly basis. The tax year-ends are mapped across the vertical axis and the months when CT/VAT payments are due on the horizontal.


Whilst you will all recognise the illustrated year end / tax cycle, it may be useful to consider which months your clients in aggregate will fall into. 

For example: B2B businesses with an April year-end – that do not benefit from Christmas trade – the December dip in liquid cash can create a difficult triple-whammy effect on their finances:

  1. Slow trading over Christmas makes it very hard to rebuild their cash reserves. 
  2. Poor revenue makes for a difficult January corporation tax (CT) bill. 
  3. This is immediately followed by the cash hit of a VAT bill in March.

This seasonal impact also carries across for those clients that have a March financial year end and tax bills due in December and February – making for a tricky quarterly period for any clients with March or April year-ends. 


Looking for the contextual tax triggers

Whilst your firm may be busy with the January tax deadline for personal tax returns, this quarter also provides a golden opportunity to offer added value for cash-challenged clients.

If you have clients with year-ends that fall in March and April, it’s more than likely that they’re about to experience a problematic 3-month period, where the cycle of quarterly VAT and annual CT payments serve to empty the kitty and add to their cashflow woes. The key to helping these clients is to look ahead at their expected tax costs and to work with the owners and executive teams to plan and mitigate the impact.

In short, by looking ahead at the relevant triggers for tax payments, your firm can plan out a client’s tax liabilities and costs across the year. You can then apply all your financial knowledge and planning skills to smooth out the tax cycle and reduce the negative cash effects.


Ways to mitigate the VAT impact


    Up-to-date cloud accounting software, such as Xero, QuickBooks or Sage Business Cloud, provides you with enhanced real-time data. This management information can then be used to understand historical tax costs, cashflow position and financial performance.
    Regular contact with clients helps you to understand their business, know their seasonal financial challenges and increase your awareness of any cashflow challenges that are on the horizon.
    With the combination of meaningful real-time data and regular catch-ups with the client, you should be in a good position to spot when cashflow is slipping into a negative position and additional funding is needed to cover tax costs.
    Running regular cashflow statements and/or forecasts helps you to understand the client’s cash position and to tie this in with the predicted tax payments that you know will be due in this quarter.
    When clients have imminent quarterly VAT bills to cover, but no working capital to pay these bills, VAT funding is a useful short-term tool for accessing the additional finance that’s required.


A word of warning: A solution commonly suggested to clients that run into cash-flow issues around CT or VAT payments is to suggest a payment plan via HMRC. Whilst this is a solution and is likely more cost effective than VAT lending via a bank or alternative lender, it will affect the creditworthiness of the business and its ability to borrow in the future. 


Building stronger balance sheets


At Capitalise, we partner with the UK’s leading accounting firms, providing business clients with access to simple, straightforward routes to funding.

By helping your firm to increase its funding advisory services, we give you the tools, education and support to work more closely with your clients. So, when quarterly VAT costs become an issue, we can connect you with a growing ecosystem of finance providers. This gives your clients access to VAT funding and finance that pays their tax bills and helps them to build strong and robust balance sheets for the future prosperity of their company.

Find out more about VAT funding with Capitalise.


Download the CT and VAT cycle chart.

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