Timing your invoices to improve cash flow

Unless you use the cash accounting scheme, you will normally account for output tax on the VAT return that coincides with your sales invoice date. How could a simple VAT trick with your invoicing help your cash flow?

Tax Points

The tax point rules identify when a supply has taken place for VAT purposes, and output tax is generally payable based on the tax point.

Tip. If you use the cash accounting scheme, the relevant date is always based on when you are paid by your customers. The tax point will be different depending on whether you supply goods or services.

Goods. The basic tax point for goods is when ownership of the goods transfers to the buyer. The basic tax point is when the services in question have been completed.

Trap. In the case of services, payments on account received during the course of a job or contract create a tax point, with output tax payable on each interim payment. The balance of output tax will be payable at the end of the job.

Ongoing Services

If your letter of engagement or contract confirms that you are making a continuous supply of services to your customer, i.e. without a clear finish date, then output tax is only payable when you either raise an invoice or receive payment, whichever happens sooner.

Tip. If you receive regular payments from your customers, you can raise an annual tax invoice covering payments due for the next twelve months if you know the amounts being paid, but you must list each individual payment and clearly show the due payment date as the “tax point” on the invoice. You will only account for output tax when each payment is received.

Actual Tax Point

If you supply goods or services the basic tax points explained above are suspended by “actual” tax points. For example, an advance payment made by your customer before goods have been supplied or a service has been completed creates an actual tax point. An actual tax point is also created if an invoice is raised within 14 days of the basic tax point.

Tip. Ensure you don’t invoice your customers after the 14-day time period. If this happens, the tax point reverts to the basic tax point again.

Trap. It is important to check the payment terms of your contract. For example, if the payment date is 30 days after the end of the month when you raise your sales invoice, this would mean a 30th October payment date for a sales invoice raised on 1st September but a 30th September payment date for an invoice raised on 31st August.

A short delay issuing your sales invoices for high value goods or services might produce a three-month cash flow advantage for VAT purposes. If you receive regular monthly payments on account from your customers, you could save administration time by raising an annual tax invoice.

Reference: Tips & Advice Financial Controller