The VAT payable to HMRC is usually payable on an invoicing basis; this means that the VAT becomes due when the invoice is raised rather than when the payment is received for that invoice. For the vast majority of contractors and consultants this should not pose any problems as their end client will usually settle the invoices in a timely manner. The implications of not receiving a timely payment are nonetheless worth exploring.
The invoicing basis means that a business can find that it will need to pay over the VAT raised on an invoice to HMRC before the funds have been received from the customer. This goes to show that profit and cash are not the same thing and that the timely collection of what is owed is an essential part of effective cash flow management for a business.
By invoicing and collecting the funds at a later date your business is offering a credit facility to your clients. If your customers are smaller set ups and on the whole not very well known to you, consider using a credit referencing facility and asking for part payment up front for at least the first invoice. If this represents a large slice of your customer base, consider using the Cash accounting scheme.
So what happens if the worst case scenario presents itself and you never receive the money from your customer? If 6 months have passed and the business is able to demonstrate that it has taken reasonable measures to try and collect the funds the unpaid amount can be written off as a bad debt. This means that the VAT already paid to HMRC in relation to the outstanding invoice can be reclaimed.
Hopefully this is a scenario that will not apply to your business, but as a client of Integro Accounting we will advise and guide you throughout the whole process, including arranging the refund from HMRC.
Why Integro Accounting?
Integro Accounting is the UK’s only specialist provider of fixed fee, limited company accountancy services for contractors, consultants and freelancers that was established to an award winning standard – our Practice Manager, Maria Hickmott FCCA, won The British Accountancy Awards’ ‘Accountant of the Year’ in 2011.
We were set up with the vision of providing a service that is the ultimate for the dynamic, busy professional of today in a language you understand.
Integro Accounting have designed a bespoke service for the contractor who is always on the go; never forgetting that one size will never fit all.
The relationship you have with your accountant is the most important factor in our service which is why we will always offer unlimited contact with your own personal accountant; whether that contact is via the phone, email or face to face.
We have our 3 offices located in London, the South-West and on the Bedfordshire and Buckinghamshire border. There are also meeting locations in many of the major cities and towns across the Home counties, South-West and South Wales, all conveniently placed so that you never have to travel far to meet your accountant.
If you have any questions about contracting or would like to find out more about how Integro Accounting can help you and business please call Christian on 01525 303984, email firstname.lastname@example.org or request a callback.