VAT Insight: Making VAT Work For You
Editor’s note: This is a guest post by Richard Barrett, Head of Consulting at vatglobal.
The COVID-19 pandemic is affecting businesses globally in ways that no one could ever have imagined. From heavy financial losses to severe manpower shortages, businesses are likely to feel the impact of the pandemic for years to come.
In times of cash-flow strain, VAT can be a very effective lever to control liquidity. To break down how you can make VAT work for you, we’ve compiled a list of eight of the most helpful tips your business may want to consider to help ease any burdens you might face:
1. Delaying when VAT must be accounted for 
There are nuances in the tax legislation regarding ‘tax point’ and when businesses should issue VAT invoices (and therefore pay VAT to the tax office). To improve cash-flow, businesses should avoid issuing a VAT invoice until necessary, as this can accelerate the time of supply.
This can be achieved by preparing a payment request/demand which confirms that a VAT invoice will be provided upon payment. It is best practice to add on the face of the demand “This is not a VAT invoice”. Doing this can achieve a VAT cash-flow advantage of up to 4 months.
2. VAT Bad Debt Relief (“BDR”)
BDR allows businesses to recover output VAT already paid to the tax office in respect of supplies when the customer fails to pay in full. To claim BDR, the debt must be outstanding for at least six months and must not have been sold or factored. The tip here is to transfer the bad debt to the VAT bad debt account, as soon as the six-month period has elapsed.
Claiming BDR is different in all countries, but is usually relatively simple and can be done through an adjustment in the next VAT return. However, there are some additional administrative requirements that must be followed.
3. Deferring VAT payments
Governments across Europe have set out measures to assist businesses, which include the deferral of VAT payments without interest and/or penalties. Each country has its own measures in place and are being revisited. Businesses are advised to continually monitor their own government announcements in their local jurisdictions
4. Reviewing past VAT returns for opportunities
An internal audit may reveal that your business has a right to reclaim overpaid output VAT on goods or services. This could perhaps because of a court ruling that supplies believed to be standard rated were in fact zero rated, or as a result of a Court of Justice decision conflicting with domestic law. These claims generally have a time limit. The claims, together with interest, can give rise to very significant payments.
Further, all businesses have input VAT they fail to claim. This can sometimes simply be down to a failure to ensure that the employees provide business with the requisite VAT invoices when they have been on a business trip. Checking and tightening up on these procedures can give rise to significant input VAT reclaims. This may be a good time for a review.
5. Input VAT on abortive costs
Costs will have been incurred on transactions and projects which have been aborted as a result of the pandemic. The input VAT on these costs is still recoverable to the extent it would have been recovered on the intended transaction or project.
6. Overseas VAT reclaims
The Refund Directive is an EU scheme which allows EU established businesses to reclaim VAT incurred in other EU member states. The 13th EU Directive is a similar scheme applying to non-EU established businesses incurring VAT on costs in the EU. Each EU member state has implemented these schemes in their national rules, with slight differences where discretion is allowed. However, a common feature is that the deadlines for filing are strict. Filing a late reclaim may be fatal for the entire year’ s worth of input VAT.
7. Sales / promotions
Business promotions are frequently used as a means of generating increased sales and to keep customers interested in their products. Provided that your business sells a range of goods which may be subject to differing VAT rates (zero-rate, reduced rate or standard rate), selling gift card/vouchers could be one way to obtain an injection of cash into your business. These types of vouchers would be considered as multipurpose vouchers. Consequently, VAT need not be accounted at the time of sale of the vouchers. Instead, they would be accounted for at the time they are redeemed. They can be sold online, critical in the current climate
8. Beware Residence Risks
The COVID-19 pandemic has brought in its wake the risk of prejudicing tax residence for both people and companies, Furthermore, is has inadvertently creating establishments both for corporation tax, and VAT, thereby distorting the place of supply rules, and great care is needed. The risks arise because key individuals may have to remain in an unforeseen location for unexpected lengths of time, during which they will continue to operate the business. In particular:
- Directors may be forced to attend board meetings and sign contracts from unforeseen locations, due to travel restrictions or family care commitments – if this problem is acute, the company could give a temporary power of attorney to others, who are located in the right jurisdiction.
- Tax residency rules for individuals will at least partly depend on the number of days spent in a particular jurisdiction. The UK rules have a maximum 60 day period spent in the UK which won’t count in exceptional circumstances. HMRC have helpfully confirmed that COVID-19 can generally give rise to such exceptional circumstances. But those affected should note that this leniency only applies for 60 days, subject to further announcements.
Interested in additional tips for making your VAT work for you? Contact vatglobal today!
I am a UK based chartered tax adviser specialising in UK and international VAT systems. I provide businesses of all sizes with tailored VAT advice and reporting to enable full compliance with international legislation, whilst being structured in the most VAT efficient way.