Using VAT money to trade

[voicey]

A couple of recent posts in the Gone very quiet thread got me thinking about how I treat the VAT I collect.

akirk said:

https://www.bbc.co.uk/news/business-66437327

Article says said:

Daniel Moore, 48, has a business called Ink Jungle that sells ink cartridges. He has £170,000 in reserve - and it is increasing by £40,000 a day, he said.
"The value they will be holding from us is disproportionately high versus the potential refunds processed by customer returns or non-delivery," he said.
His company turns over about £16m on Amazon and employs more than 20 staff.
Daniel said the withheld funds meant he will be unable to pay his £191,000 VAT bill, which is due this week.
He has contacted his local MP and the Financial Conduct Authority.

So, he can't pay a VAT bill of £191,000 because of a 7 day delay to payments? That is surely a red flag that he is using his VAT to trade - VAT is 3 monthly and you pay it over a month after the end of the period - so all of that £191,000 should be VAT from monies he has already received if Amazon are only delaying by 7 days... so he must be using income from future sales to pay VAT on past sales - not sure that is a robust business model - Amazon are simply highlighting the issue, not causing it...

akirk said:

it is a common mistake for businesses to see VAT as income and to forget that they are simply tax collectors - VAT in should simply move from current account to holding account and then be paid out to HMRC - it should never come into the normal cashflow...

I have taught myself how to run this business (vehicle repair) and think I do OK. I have never had a problem paying a VAT bill (approx £15-20k per quarter) but I don't specifically move VAT money aside as it comes in. I'm not sure how I could effectively manage the transfers as the VAT holding account would be debited/credited constantly (I have approx 7:1 ratio of purchase:sales invoices).

I guess that I'm not using VAT to trade as I maintain a healthy cash balance in order to meet my future obligations (Payroll, VAT, etc) but it's only a guess - maybe I am!

The reason for the thread is to find out what other people are doing and see if I need to make a change to my operating procedures...

[springfan62]

Vat is just part of a normal businesses's cashflow so needs to be managed but I don't think it necessary to put it in a separate account just make sure its included in cashflow planning for the business.

[paulwirral]

I used to consider it a short term loan from the government , but I never relied on it like some people I knew .

[stinkyspanner]

Surely you only pay VAT on money received, therefore if Amazon are holding the funds then VAT isn't payable on it until you receive it

[Dg504]

It’s been used and abused for a long time now. I doubt it will take us long to have first-hand best and worst real life examples from just us lot.

I like to think most people start out with the best of intentions - the cash does belong to hmrc after all - and either earmarking it or moving the cash to a separate account. Completing returns and paying on time.

This can quickly be upset by other cashflow problems though especially in certain sectors, poorly timed quarterly accounts and clunky cash-flows. Just like this guy. When the choice becomes use the cash to keep trading or fold, I reckon most would side with the former. And then it can very quickly get out of hand.

[Ham_and_Jam]

stinkyspanner said:

Surely you only pay VAT on money received, therefore if Amazon are holding the funds then VAT isn't payable on it until you receive it

VAT is due on sales (vat invoice), when you receive the money from the customer is not relevant.

[2 sMoKiN bArReLs]

I worked in a business where the VAT we paid was £250,000 per quarter more than the VAT we collected. This was also 30 years ago when £250,000 was a lot of money! (About 1/2 million today) Despite being profitable it was a bit of a devil. (Plus we had a VAT inspection every quarter before they made the refund!)

[TallPaul]

Ham_and_Jam said:

VAT is due on sales (vat invoice), when you receive the money from the customer is not relevant.

VAT Cash Accounting Scheme

[Sheepshanks]

2 sMoKiN bArReLs said:

(Plus we had a VAT inspection every quarter before they made the refund!)

That can't be routine otherwise VAT carousel fraud wouldn't work.

[Chris Type R]

TallPaul said:

Ham_and_Jam said:

VAT is due on sales (vat invoice), when you receive the money from the customer is not relevant.

VAT Cash Accounting Scheme

While correct, the example company has a turnover which is far too high - "your estimated VAT taxable turnover is £1.35 million or less in the next 12 months"

[TallPaul]

Chris Type R said:

While correct, the example company has a turnover which is far too high - "your estimated VAT taxable turnover is £1.35 million or less in the next 12 months"

Aah, missed that bit, well spotted!

[Eric Mc]

TallPaul said:

VAT Cash Accounting Scheme

Is a special scheme not applicable to many businesses (and not always desirable).

[2 sMoKiN bArReLs]

Sheepshanks said:

2 sMoKiN bArReLs said:

(Plus we had a VAT inspection every quarter before they made the refund!)

That can't be routine otherwise VAT carousel fraud wouldn't work.

We were on the radar

[Scarletpimpofnel]

springfan62 said:

Vat is just part of a normal businesses's cashflow so needs to be managed but I don't think it necessary to put it in a separate account just make sure its included in cashflow planning for the business.

Rightly or wrongly that is precisely what I did. I had a detailed cash flow model and VAT was simply another line item of outflowing cash that had to be met like any other cash outflow. I never used a separate account etc. My company was only an sme though. I'd be interested to know what a large company does with it's VAT that it is sat on, anyone know?

[2 sMoKiN bArReLs]

As said, just normal cash flow. No different to the cash you owe trade suppliers really.

[akirk]

Well, as you quoted me…

We have an internal system (we code systems so write it ourselves) which runs our projects / invoicing / reconciles the bank etc.

With every invoice marked as paid the vat balance goes up, with every transaction marked as spent the vat element (sometimes 0 usually 1/6th) pushes the balance down - the system tells us what our next vat bill will be and we keep that in a separate account ( we also separate off cash for corporation tax)

The system also produces the figures for the vat return so it is pretty accurate - every quarter we spit out figures for the return and then transfer that money out of the vat account and pay the bill…

Very simple and no hassle, means that we always prioritise the tax man - our cash flow is easier though as we are transacting our time not a physical product so we have no issues with cash held in stock etc, I do understand how that happens but I will stand by my comment in the previous thread that it is a red flag, especially for a firm of that size to be juggling the vat bill in the cash flow - it suggests a very tight path being walked as to the liquidity of the company

[fridaypassion]

I just have VAT as an annoying part of cash flow. If you wanted to try and do something with some cash you can hang onto your corporation tax for 3 months without even getting a letter from HMRC. As long as you get your return on they don't seem bothered.

[President Merkin]

fridaypassion said:

I just have VAT as an annoying part of cash flow. If you wanted to try and do something with some cash you can hang onto your corporation tax for 3 months without even getting a letter from HMRC. As long as you get your return on they don't seem bothered.

Same. Maybe it's because we've always kept a decent bank balance, our current ratio is nearly always 2:1 or above, so we've never split out our VAT into a separate account, just pay it out of the sole account every quarter. I do resent being an unpaid tax collector for HMG but that's for another thread.

[Panamax]

At face value the subject is just cash flow, but there are significant nuances,

VAT based on 20% of turnover can be a big part of overall cash flow
Most business that go bust do so when cash flow turns negative
The timing of VAT payments to HMRC makes it very tempting to use that cash in the meantime to paper over cracks in a failing business.

So the VAT-man is just another frustrated creditor when the company goes bust? Yes and no.
Most creditors suck up their losses and go away quietly.
The VAT-man doesn't.
The VAT-man is often a big creditor and needs to show you and other people that he's not to be messed with.

When an unincorporated business (sole trader) collapses the owner has full personal responsibility for all debts.
When a company collapses the owner will have full personal liability if the company has traded while insolvent - which in this case means carrying on a business propped up by spending the VAT when there's no realistic prospect of survival. In extreme cases there may also be other sanctions for wrongful or fraudulent trading.

Can you use future tax money to help cash flow? Yes.
Should you make darned sure you'll be able to pay the tax when it falls due? Yes.
If in doubt, is the safest approach to park future tax payments away from your routine cash flow? Yes.

[DaveA8]

I’d say 90% of companies in the construction industry do this in the good times and 99% by this time next year