Keeping it all in check: how to reduce the stress of cash flow uncertainty

By Mike Chapman, Director of Corporate Tax, Knill James

Many businesses have deferred some VAT or other taxes over the last few months. This took the pressure off for a period, but the current VAT and tax deadlines still keep coming. We want to help you to get organised and ensure you have considered how you will meet these due dates.

We have prepared an Outgoings Timeline here, so you can easily see when significant payments will become due over the next 18 months. These could be taxes, other deferred costs or loan repayments, or maybe you've had a rates holiday for 2020/21 and these payments will start again in April 2021.

Any deferred VAT from March-June 2020 will be due by 31st March 2021 and Corporation Tax will be due as normal for limited companies nine months (and one day) after your year end, with VAT and PAYE/NIC due on normal due dates, unless you have agreed a different arrangement with HMRC.

Tax hotspots

There will be more pressure on certain times of the year, depending upon your year-end and VAT periods.

A business with a December 2019 year end and VAT quarter, for example, could have the following payments due in the next few months:

  • Corporation Tax 1st October
  • VAT 31st October

And looking further ahead, a business with a March 2020 year end and VAT quarter could have the following payments due early next year:

  • Corporation Tax 1st January 2021
  • VAT 31st January 2021
  • VAT (deferred from March 2020 quarter) 31st March 2021
  • VAT 30th April 2021

In the above example, February is the only month in the first four months of 2021 where there isn't a significant payment due.

Most businesses will have some real pinch points on the way, and we'd advise you to plan ahead, to ensure you can meet these payments when they are due, rather than find yourselves in a highly stressful situation, potentially at the last minute.

Ways to reduce the stress from cash flow uncertainty

  1. Better accounting information and tax data: up-to-date cloud accounting software, such as Xero, QuickBooks or Sage Business Cloud, provides you with enhanced real-time data. This management information can then be used to understand historical tax costs, cash flow position and financial performance.
  2. Talk to us: when we have regular contact with our clients, we are able to understand your post-lockdown challenges and increase your awareness of any significant cash flow challenges that are on the horizon.
  3. Identify the short-term funding gaps: with meaningful real-time data, you should be in a good position to spot when cash flow is slipping into a negative position and can then take steps to mitigate the impact over the short term.
  4. Improved control over cash flow: preparing regular cash flow projections provides further data to assess the future cash position and to tie this in with the predicted tax payments which you know are becoming due.
  5. Take appropriate steps or get products to fill the gaps or smooth the cash flow: when cash flow cannot be managed in the short term, it could be that an arrangement with HMRC is possible, or an injection of external working capital could be more appropriate. There are various finance products which could fit. Term loans, invoice finance, or VAT funding could provide access to the additional finance which is required. 

Finance options to smooth the cash flow impact of tax liabilities

There are potentially three routes which you can take to smooth the impact of significant costs on your working capital. We address the pros and cons of each below.

Pros

Cons

1. Agree a Time to Pay Arrangement (TTP) with HMRC

May be lower interest than other forms of debt finance

Won't affect the business's credit score with Experian, Equifax, etc

Simple to administer as linked to particular taxes/amounts due and can also include some future taxes

Needs to be agreed in advance of due date

Interest likely to be payable

Need to demonstrate all other avenues have been explored first

May prevent other lenders offering facilities in the future

If payments are missed, there could be swift & severe consequences and more difficult to renegotiate

2. Obtain external working capital facilities such as loans or invoice finance

Can be used to settle any outgoings, not only tax liabilities

Facilities may be extended if the business is considered credit-worthy

Dependent upon the lender, can be very quick to obtain

Interest and fees are likely to be payable

May also require additional security

Will affect the business's credit score

3. Obtain a VAT Funding Facility to spread the VAT costs over three months

Likely to be unsecured finance, but personally guaranteed.

Short-term commitment, typically three months, although can be repeated each quarter

Will incur interest and fees

Will affect the business's credit score

Difficult to 'pay off' if it becomes a rolling requirement each quarter

Leave No Business Behind

There are various options for businesses struggling to meet tax liabilities or other cash outgoings, and by discussing your situation with us, we can help you assess which may be available and most suitable for you.

We have joined with the accounting community to ensure businesses are supported and clear about their ability to trade through this pandemic and get back to full business health, building strong and robust balance sheets for the future prosperity of your company.

If cash flow is a worry for your business, we are connected to a growing ecosystem of finance providers and also have experts who can liaise with HMRC about future liabilities.

Please don't hesitate to get in touch; contact us on 01273 480480.

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