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Smoothing out the VAT cycle post-lockdown

The solutions (with their pros & cons).

Paul Surtees Aug 04, 2020

2020 has been a tough year for your accounting firm’s business clients. They’ve had to navigate the choppy waters of the COVID-19 pandemic, and move through the process of shutdown, survival and recovery. So, given the upheaval we’ve all experienced, it’s understandable that they may not have the funds to pay all their taxes at present.  

Many clients have already deferred their historical tax liabilities, either under the automatic system for VAT, or by arrangement with HMRC, and the due dates for current VAT, Corporation Tax etc keep on coming.

 

An unexpected drop in revenues and the pressure of tax bills 

Your clients are working in highly challenging times. They’re dealing with the problems of operating a business in the post-lockdown market and the potential threat of a worldwide recession – while also coping with all the other everyday financial responsibilities of running their business, not to mention many having a real-time drop in their forecasted sales and revenue and increased payroll costs as the furlough scheme gradually tapers to its conclusion in October 2020.

So when it comes to dealing with their impending tax liabilities, it’s going to be tougher than ever for them to focus on, and remember to, meet those deadlines. These businesses will be grateful if you can prompt them and advise them how they can meet these VAT and CT payments.

 

Mapping out the tax hotspots

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. It’s mapped with tax year-ends along the vertical axis and the months when CT/VAT payments are due on the horizontal axis. 
 

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

 

  1. 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
     
  2. 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
     
  3. 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
     
  4. 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
     
  5. 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

 

To note

  1. May be lower interest than other forms of debt finance
  2. Won’t affect the business’ credit score with Experian, Equifax etc
  3. Simple to administer as linked to particular taxes/amounts due and can also include some future taxes
     

Requirements

  • 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
 

To note

  1. Can be used to settle any outgoings, not only tax liabilities
  2. Facilities may be extended if the business is considered credit-worthy
  3. Dependent upon the lender, can be very quick to obtain
     

Requirements

  • 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
 

To note

  1. Likely to be unsecured finance, but personally guaranteed.
  2. Short-term commitment, typically 3 months, although can be repeated each quarter
     

Requirements

  • 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

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