Add onto this, any deferred VAT from March-June 2020 which will be due by 31st March 2021 and any other historical taxes the business has deferred such as PAYE/NI.
So looking at these monthly cash flows in more detail, a client with a December 2019 year end and VAT quarter, for example, could have the following payments due soon:
- VAT 31st July
- Corporation Tax 1st October
- VAT 31st October
And looking further ahead, a client with a March 2020 year end and VAT quarter could have the following payments due early next year:
- Corporation Tax 1st January 2021
- VAT 31st January 2021
- VAT (deferred from June 2020) 31st March 2021
- VAT 30th April 2021
For many businesses, there are some real pinch points coming and it would be wise for them to plan ahead, to ensure they can meet these payments when they are due, rather than find themselves in a highly stressful situation, potentially at the last minute.
Ways to reduce the stress from cash flow uncertainty
- Better accounting information and tax data – 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
- More frequent catch-ups with clients – regular contact with clients over the coming months helps you to understand their post-lockdown challenges and increase your awareness of any significant cashflow challenges that are on the horizon
- Identifying the short-term funding gaps – 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 steps need to be taken to mitigate the impact over the short-term
- Improved control over cashflow – preparing regular cashflow projections provides further data to assess the future cash position and to tie this in with the predicted tax payments which you know are becoming due
- Using appropriate funding products to fill the gaps – when cashflow cannot be managed with the assistance of an injection of external working capital, there are various debt products which could fit. Term loans, invoice finance, or VAT funding could provide access to the additional finance which is required.
Finance options to smooth the cashflow impact of tax liabilities
Agree a Time to Pay Arrangement (TTP) with HMRC
- May be lower interest than other forms of debt finance
- Won’t affect the business’ credit score with Experian, Equifax etc
- Simple to administer as linked to particular taxes/amounts due and can also include some future taxes
- Needs to be agreed in advance of due date
- Interest likely to be payable
- Need to demonstrate all other avenues have been explored first
- May prevent other lenders offering facilities in the future
- If payments missed, there could be swift & severe consequences and more difficult to renegotiate
Obtain external working capital facilities such as loans or invoice finance
- Can be used to settle any outgoings, not only tax liabilities
- Facilities may be extended if the business is considered credit-worthy
- Dependent upon the lender, can be very quick to obtain
- Interest and fees are likely to be payable
- May also require additional security
- Will affect the business’ credit score
Obtain a VAT Funding Facility to spread the VAT costs over 3 months
- Likely to be unsecured finance, but personally guaranteed.
- Short-term commitment, typically 3 months, although can be repeated each quarter
- Will incur interest and fees
- Will affect the business’ credit score
- Difficult to ‘pay off’ if it becomes a rolling requirement each quarter
Leave no business behind
There are various options for a client struggling to meet tax liabilities and by opening up those discussions, you can start to understand which may be available and most suitable for your client.
At Capitalise, we’re working with the UK’s leading accounting firms and providers to make sure all SMEs get back to full business health, by providing simple, straightforward routes to funding. Join the #LeaveNoBusinessBehind campaign.
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 during the difficult times that may lie ahead.
If quarterly VAT costs or tax bills become an issue for your client, we can connect you with a growing ecosystem of finance providers. This gives your clients access to finance to grow their business again, helping them to build strong and robust balance sheets for the future prosperity of their company.
Find out more about VAT funding with Capitalise
Find out more about Invoice Finance with Capitalise