While reclaimable vat looks like a complicated issue, you can use it to your advantage and improve the cash flow in your business. Read on to find out more.
To some businesses, VAT might seem like an inconvenient thing but if you plan well, it can actually help you save some money. As far as cash flow is concerned, there are ways of handling your VAT to free up some cash but it is important that you understand the basics. If you can maintain a strict invoice management system, you can get some cash back into your business.
What is VAT?
Basically, value added tax is a form of tax that is applied to consumers indirectly. Its branded value added because your business will be paying tax after adding value to goods and services passed down to consumers. When buying raw materials, you pay tax but you can claim back the VAT from the government. After adding value, you have to include VAT in the selling price.
Businesses are required by law to register for VAT as long as the annual turnover crosses a predetermined threshold. As a consequence, all registered businesses are expected to charge VAT on all sales and disclose the same on the invoice.
As a consumer, you pay VAT on almost everything you purchase but there is no way of getting a refund. But as a business, the government allows you to ask for reclaimable vat on most business expenses. Before filing the claims, make sure the item in question is reclaimable.
Reclaimable vat: How it can help your business
Generally, reclaimable vat is applicable for expenses that can be proved with an invoice. If the turnover for your business is less than $1,000,000, it’s possible to request your VAT office to be granted permission to submit the VAT on money received basis. This implies that you will only be required to pay the VAT when your customers have paid you for the delivered goods or services. This can dramatically improve your cash flow because you only the taxes when you have the funds. On the other hand, when the payments are based on the invoices you are expected to pay the money from your pocket even when your clients haven’t paid you. For more information, click here.
Unlike in sales, you can reclaimable vat is allowed for purchases as soon as you have the invoice. This means you have an opportunity to increase your cash flow if you can be proactive and manage your suppliers. In a nutshell, you can get the refund even before you make the payment for the goods or services as long as you have an invoice that proves you have purchased the items. But for this to work seamlessly, the dates on the invoices have to be strictly within the current VAT period.
If you can convince your suppliers to issue the invoices by the end of the month without fail, it means you can get a VAT refund two months earlier. On the other hand, getting the invoice at the beginning of each month can delay the refunds for two months. As such, it is important that you develop a routine of outstanding supplier management and ensure you have the invoices as early as possible so that your cash flow can improve. To learn more about this, click here.