VAT – the elephant in your bank account

18 December 2015

With VAT currently at 20% businesses are receiving and holding significant levels of funds in the name of HMRC. These funds then sit in the bank as a balance for up to three months before forming part of a VAT return. This quarterly demand creates significant movement in funds and such peaks and troughs should be carefully managed by good cash flow management. However, with cash flow management often limited, as business owners concentrate in other areas, problems can quickly arise.

Therefore, now may be the time to move VAT from quarterly to monthly payments with the aim of ‘smoothing’ cash flow.  Please see the illustration below.

Quarterly

Graph 1

Monthly

Graph 2

By changing this process you avoid the roller coaster ride of large quarterly payments and the false security of carrying VAT collections as cash flow.

For cash flow forecasts and tips on how to manage working capital please get in touch with one of our specialists.

For further information on this blog post, please contact our corporate finance specialist Tom O’Brien.