Amend VAT periods
Let’s get out our dustpan and brush and start with an easy one: there are still thousands of UK businesses who submit returns to HMRC for periods that do not coincide with their financial year. This makes as much sense as forming a brass band with no trumpets.
A business can make a change of stagger – the phrase used by HMRC for return dates – at any time by accessing its HMRC account; a single return will be completed for either two or five months to achieve the alignment, job done!
It is important to keep an eye on allocated periods and submit the two-monthly return on time – if it is relevant – because it will still be subject to interest and penalties if it is submitted and paid late. As we all know, the annual interest rate for late tax payments was increased to 4% over the Bank of England’s base rate from 1 April 2025 rather than 2.5%.
Delay issuing tax invoices
Many businesses make continuous supplies of services to their clients. In such cases, a tax point for VAT purposes is created when either a sales invoice is issued or the client makes a payment. It is common practice for many businesses to issue a ‘request for payment’ or ‘fee note’ to delay the tax point and only issue an invoice when a payment has been made; this practice should be considered by more business owners because it will move the tax point into the following period in some cases, therefore improving cash flow:
- letters of engagements agreed with clients should make it clearer that services are ongoing, i.e. they do not have a natural completion date;
- clients should be made aware that they can only claim input tax when they receive a tax invoice – which will hopefully encourage prompt payment – a well-written note on the invoice should suffice.
Leave VAT schemes
You might think my advice here would be to consider joining VAT schemes rather than leaving them; that’s a fair comment but I like to be different!
- Cash accounting scheme (CAS) – scheme users sometimes forget that input tax can only be claimed when payments are made to suppliers. If a business pays suppliers slowly but has customers who pay promptly – a utopian combination – the CAS is as useful as a sniffer dog with a heavy cold. A business can leave at the end of any period and there is no need to notify HMRC. Output tax on closing debtors and input tax on closing creditors can be declared and claimed as they are paid over the following six months after the exit date ( HMRC Notice 731, para. 6.4 ).
- Flat rate scheme – the RIP date for the FRS was – in my opinion – 1 April 2017 when HMRC introduced the draconian rate of 16.5% for a limited cost business, i.e. a business that does not buy many goods. Two things are often forgotten: firstly, a business must check its status at the end of every period, which can be time consuming; secondly, many goods are excluded from the calculations, e.g. road fuel for a business is not supplying transport services, or food and drink purchased for subsistence purposes for employees. As the old saying goes: ‘Life is too short to stuff a mushroom’ – if the time or tax saving benefits are minimal, it is best to revert to normal accounting and exit the scheme ( HMRC Notice 733, section 4 ).
Claim bad debt relief
It is time to get out our best brushes and sweep through aged debtors reports to check if any sales invoices in the end columns will never be paid and bad debt relief can be claimed on the next return:
- the invoice must be more than six months overdue for payment and written off in the sales ledger, i.e. a bad debt expense has been created in the profit and loss account;
- the invoices must relate to a genuine bad debt, rather than a customer dispute about the amount charged or quality of the goods or services that have been supplied. Output tax must have been declared on an earlier return, i.e. the business does not use the CAS where bad debt relief is automatic;
- the debt has not been paid, sold or factored under a valid legal assignment.
As a separate issue, aged creditors reports should also be reviewed; input tax must be credited on the next return if any purchase invoices are more than six months overdue for payment. Input tax can be subsequently claimed if the supplier is paid in the future.
Final thoughts: HMRC spring clean?
I couldn’t write an article about spring cleaning without giving a few ideas about how HMRC could tidy up and simplify the VAT legislation and accounting issues. A very powerful vacuum cleaner would be needed but here are a few thoughts.
- More reverse charge accounting: it has worked brilliantly in the construction industry since its introduction in April 2021 – with a clear reduction in fraud – why not extend it to further industries as an anti-fraud measure?
- Abolish flat rate scheme: it has served its purpose and should now be abolished instead of HMRC continuing with the strategy of reducing the number of users by keeping the joining threshold at £150,000 of annual taxable sales or less excluding VAT; this limit has not been increased for over 20 years.
- Review zero-rating of food and drink: no comment is needed here because we all know the problem … and so does HMRC!
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