Managing Your VAT to Improve Your Cash Flow
In today’s market where cash is king it’s important to have a greater control over your cash flow and to look at ways to improve it. One way to improve cash flow is to look at your system of recording and paying VAT.
In Ireland there are two methods used to account for VAT. The first method is the Accruals Basis and the second method is the Cash Receipts Basis.
- Accruals Basis: With this method, VAT is recorded as the sales and purchase invoice(s) are received and VAT is paid over at the period end regardless of whether you have paid or been paid for the invoice.
- Cash Receipts Basis: With this method, VAT is recorded as the purchase invoice is received, again regardless if it has been paid or not. VAT on sales invoices however, is only paid over once the cash for the invoice has been received.
So how does this improve cash flow? Let’s look at an example:
Company A makes a sale which includes VAT of €100 for the VAT period January/February 2010. During the same period they have made purchases which include VAT totaling €20. Therefore, Company A’s VAT liability for the January/February 2010 period is €80. This will need to be paid over to the Revenue Commissioners by the 19th March however, if Company A did not receive payment for the sales in the this period they are now €80 negative with their cash flow.
Cash Receipts Basis:
Again, exactly the same situation as above but this time Company A has elected to pay VAT on a cash receipts basis. Look at the difference to cash flow – The sales VAT of €100 has not been received at period end, therefore this VAT does not need to be paid over. The purchase VAT of €20 can be claimed back, regardless of whether it was paid or not. Therefore, Company A will actually receive a VAT refund of €20.
There are a number of rules if a company wishes to elect for the cash receipts method of VAT accounting.
- Its total turnover for the year must be less than €1million or,
- 90% of its receipts must come from unregistered customers – e.g., a shop.
- You must notify the Revenue Commissioners before you change methods.
If anybody has any questions on the above we are always free to answer them!