As the vast majority of business owners will already know, timing is crucial when it comes to the payment of VAT.

Generally speaking, every transaction must be shown on your VAT return if the ‘tax point’ (the point at which the VAT is accountable) falls within that particular VAT period. The trouble is that the VAT must be paid whether or not the payment has been received, and this inevitably has a knock-on effect for many businesses.

VAT penalties and surcharges can be applied if:

• HMRC does not receive your HMRC by the deadline;
• Full payment for the VAT due on your return has not reached HMRC’s account by the deadline.

That means through no fault of your own, you can find yourself in a position where you’re paying VAT on payments that have not been made. Worse still, if you are unable to make the payment due to cashflow problems caused by the lack of payment, you could find yourself paying a late payment penalty, further adding to the amount you owe.

When is the VAT ‘tax point’?

The tax point is usually the date on which goods were supplied and services completed. However, there can be some variations:

• If the VAT invoice is issued or payment is made before the basic tax point, the tax point becomes the date of invoicing or the date of payment, whichever comes first;
• If the VAT invoice is issued up to 14 days after the basic tax point, the date the invoice was issued becomes the tax point – however, it is possible to agree an extension by making an application to HMRC;
• With continuous supplies, the tax point occurs when a VAT invoice is issued or the payment is made, whichever comes first.

However, there is VAT relief available for bad debts. This is only the case when the invoice is more than six months overdue and has been written off in a specific VAT bad debt account. The rules have changed and customers no longer need to be told that bad debt relief claims are being made.

Unpaid invoices and overdue VAT

The latest figures from the Asset Based Finance Association show that UK SMEs are currently owed a total of £67bn in unpaid invoices. Contributing to this growing mass of unpaid invoices is the fact that SMEs have to wait longer for invoices to be paid, with small business waiting an average of 71 days, compared to multinationals whose invoices are paid in 48 days.

As a result of late and unpaid invoices, the amount of overdue VAT owed by UK SMEs has reached an estimated £2.6bn, and this is having a dramatic effect on cashflow. To bridge this growing gap in payments received and money owing in VAT, companies are increasingly turning to alternative finance types like invoice finance.

The role of invoice finance

Invoice finance is an agreement whereby a third party, like a bank or financial institution, agrees to buy unpaid invoices for an advance fee, typically 70-90 percent of the invoice’s value. The business then receives the rest of the payment, minus the lender’s fee, when the payment is made.

In today’s market, SMEs can choose to sell single invoices in a quick and straightforward manner, or reach a longer term agreement to sell their entire debtor books. This means companies can get their hands on cash tied up in invoices often within 24 hours of the invoice being issued. This allows them to stay on top of their payments and pay any VAT owing as and when it falls due.

What are your other options?

Alternatively, if you have applied for the cash account VAT scheme, you do not have to account for VAT until the services have been paid for, and likewise, you do not get credit for input VAT on costs until you have paid your suppliers. This is clearly advantageous as you effectively receive bad debt relief on any customers that fail or are late to pay.

If you are not in the cash account VAT scheme, you can claim back the VAT on sales to customers who have not paid once the debts are six months old. However, this does not necessarily remove the cashflow shortfall that will exist.

How can we help?

If you can’t pay your VAT or are struggling to make significant VAT payments, we can help. We offer advice when tax debts cannot be paid and where pressure is applied to firms whilst they are unable to pay corporation tax, or not paying PAYE arrears. For free advice on what to do next, please call 08000 746 757 or email: for a confidential, no-obligation discussion with one of our experienced advisors.