CIS VAT Changes – Cash Flow & The VAT Gap
From 1st October the new rules on responsibility for paying VAT and how VAT is handled comes into force.
If you want to understand how these changes work and what you should do then speak to your accountant, this article looks more at the potential cashflow issues that may arise as a result.
HMRC have produced a webinar highlighting what to do and who is impacted by these changes, you can watch the webinar here. For all contractors and sub-contractors who aren’t 100% clear on the changes it would be well worth watching.
The Cash Flow Issue
If we look at how things are changing then you get an idea of the potential cash flow gap that could arise if you do nothing and why that cash flow need has to be considered now:
- From 1 October 2020, new ‘reverse charge VAT accounting’ rules will apply to all qualifying supplies made on or after that date. This will mean that: Suppliers of goods or services will no longer be involved in the payment of VAT to HMRC.
- The liability for VAT payment will now be with the VAT registered customer. The customer must declare the VAT due as output tax on their own VAT return and reclaim it subject to normal rules via the reverse charge mechanism
This means that sub-contractors will be invoicing for the cost of their services with them being paid less the VAT. The sub-contractor will put a claim in for the VAT. This may mean that they become a net claimant from HMRC.
The cash flow issue is that if the sub-contractor is not up to speed with their VAT or is not submitting monthly returns then they will be short of the VAT element of their invoices. From 1st October these businesses will have a 20% hole in their cash flow.
Even at the best, there will be a 20% hole in cash flow for at least 30 days. Bear in mind that the outgoing cannot be delayed and the income cannot be accelerated.
Financing the cash flow gap
For those companies impacted by the VAT changes then it would be well worth looking at the options now in conjunction with getting the correct structures in place for managing the change in VAT rules.
With bank overdraft borrowing becoming more expensive and subject to more stringent underwriting rules, those businesses who leave it until the event to seek overdraft funding will find life unnecessarily harder.
There are other options available, as always the more time you have the more options you have.
If you are seeking finance to cover any cash flow shortfall then bear in mind that financing this gap in isolation won’t work. Speak to your accountant, get the right structure in place well ahead of October and for solutions to finance the VAT gap then get in touch.
By Dave Farmer