Deferral of VAT
When a business buys an asset or piece of equipment then VAT is paid at the point of purchase. Whilst this can be claimed back later it is still a dent in cash flow.
For the odd smaller asset this is no real issue. When the asset becomes larger in size or multiple items are being purchased (fleet of vans etc) then the three-month wait for reimbursement can be a big dent in the cash flow.
For businesses that will feel the impact of the gap between paying the VAT and receiving the VAT back, there are some options that are sometimes missed.
Asset & HP Finance
If we take the standard way of financing an asset, being an HP, asset or lease agreement, then normally VAT would be paid on purchase and the balance of the price financed over a fixed term.
For those companies where the VAT gap is an issue, or they would simply be better retaining that cash, then many lenders will allow deferral of VAT.
This means that rather than pay the VAT on day one, it can be deferred to day 90. The effect is that the 20% that would otherwise be absent from your cash flow is now retained. The VAT payment is timed to tie in with the reimbursement date, meaning no impact on cash.
There is a cost to doing this, that said, working an interest payment on the VAT only for a period of three months is usually a minor cost compared to the benefit.
If you want to know more about how this works then get in touch. It isn’t right for everyone but for businesses that are looking to acquire assets or equipment then using an option to defer VAT can benefit cash flow and mean your assets are generating an income whilst your cash flow remains as it was before.
Worth considering next time an asset or equipment purchase is on the horizon.
By Dave Farmer