COVID VAT cash savings checklist
- Aug 18, 2020 | Richard Asquith
Whilst businesses begin to emerge from the lockdown phase of the coronavirus crisis, cashflow management remains paramount. The liquidity risks around a collapse of turnover, non-payments by customers and banking credit restrictions represent the biggest survival challenges for hundreds of thousands of businesses.
VAT, GST and sales taxes offer major liquidity opportunities
International VAT, GST and U.S. sales tax represent a major key in the challenge of sustaining threatened cashflows on two fronts:
- Simple reviews of existing process and compliance obligations can release immediate cash flows:
- Check supplier invoice tax point as the Accounts Payable may be failing to post them early in the receipt period. Bringing them forward to an earlier VAT return will reduce VAT payments.
- Services import VAT benefits from switching to non-resident suppliers and being able to utilise the reverse charge. This means no VAT cash payment. However, this brings sourcing challenges, so should be considered very carefully.
- Supplier VAT mistakes on the correct determination of charges on domestic and cross-border invoices will result in overcharged tax or possible future audits in the case of undercharges. Detecting these errors is a challenge as they will be deeply buried in Accounts Payable. But automated tax engines, which can verify the correct VAT calculations and deductibility could be the answer for fast and accurate identification of simple cashflow prospects.
- Update invoices and contracts on renegotiations. Whilst you may have negotiated cancelled, delayed deliveries or reduced payments on supplies, financial leases or rentals, it is important to have the reflected in VAT invoices to ensure you enjoy delayed VAT payments too.
- Review of T&E expenses, which can be extended to pre-lockdown may reveal missed claims of VAT incurred by employees. If invoices are missing, it is possible to provide credit card statements as evidence for VAT reclaims in certain circumstances. A first step is audit crawl tools, which can scan expense management systems or the AP ledgers.
- Review foreign VAT suffered on expenditure in current and the prior year’s Accounts Payable. Most companies overlook the opportunity to apply for refunds for this foreign VAT. Automated search tools and VAT engines can do this automatically, and typically identify, within hours, thousands in missed cash recovery opportunities. This typically covers travel and promotion costs in other countries. Remember, 2019 expenditure is still largely reclaimable as most EU states have extended deadlines during COVID.
- VAT bad debt relief allows for the recovery of VAT paid on sales that have become irrecoverable. In the COVID crisis, liquidity and customer receivables management is already a major challenge.
- Shift sales tax point from the issuance of the invoice date to the payment or delivery date. This move, which delays the payment of VAT, is possible in some countries around the world. Alternatively, a payment order to suppliers has the same effect of delaying the VAT payment.
- VAT on vouchers and discounts as businesses look at creative ways to kick-start sales after the lockdown. Properly structured, sales of vouchers may be initially treated as VAT zero-rated. The VAT is due when they are redeemed. Similarly, for free promotional or discounted goods, it is important to get the VAT treatment right to cut cash payments.
- VAT credits are often re-paid automatically from returns, depending on the local rules. However, many countries expect an application. So, check VAT balances for excess credits, and whether they may be recovered with a simple application.
- Switch to cash-based VAT schemes in countries which operate them. Typically, these are for small businesses, and avoid the extended VAT bill which can arise on ‘accruals-based’ VAT during a credit crunch.
- VAT group extensions. Consider inviting any related party suppliers into VAT group registrations to pool VAT inputs and reduce VAT liabilities.
- Import VAT which may have been paid for clearing goods into a country but paid via a freight forwarder. Often the recoverable VAT gets buried in the agents’ bills and is missed. Again, it may be possible to put this through a VAT return or apply for recovery.
- Deferred VAT schemes allow businesses to bypass the cash payment of any import VAT. Many European countries now offer these, and it is worthwhile checking if you can benefit from them, or if you can economically redirect imports to countries with the best schemes e.g. Netherlands and Belgium.
- Offset VAT against other taxes is possible on credits in some countries and should be checked with local teams or advisors.
- Taking advantage of all the plethora of VAT emergency measures offered in most countries. This can help with cashflows, but also reduce the VAT compliance burden on hard-pressed staff. Check Avalara’s COVID VAT measures tracker for country-by-country details.
- VAT payment holidays are now available in most countries. Even as many are phased out as economies re-open, most tax authorities have indicated they are willing to extend repayment terms on a case-by-case basis. It is therefore important to stay up to date on each jurisdiction’s measures and act to delay payment where there is no or limited interest charges.
- Switching filing deadlines to extend VAT credit payment dates by going from monthly to quarterly returns. Or vice-versa if your return is regularly in credit. Again, tax authorities are proving flexible in the interpretation of the thresholds and rules, and will make exceptions on the changes.
- Bad debt relief changes to existing guidelines, including shortened bad debt periods and/or no audit requirements for recovery of customer VAT payments.
- Switch to e-invoices or PDF’s instead of paper-based invoices when offices are fully or partially closed. This can reduce the strain on already overstretched finance teams.
- VAT assessment suspensions and other postponements to tax audits can be applied for to free-up staff to focus on more pressing issues and business requirements.
- Digital VAT registrations as businesses seek alternative supply chains or pass distance selling or remote seller thresholds. Tax authorities are relaxing the need for paper-based applications or supporting documents and wet signatures.
Major VAT reform relaxations whereby governments suspend or do not implement major reforms. This offers to the flexibility to continue with deployment of new measures if already planned by the business, simply to delay development.
Download the full guide
VAT rallies to the COVID-19 business challenge
This article is taken from our new guide which explains the measures business needs to take to capitalise on the liquidity prospects available in the COVID pandemic... how tax automation can help in this respect... and what might be coming next.