Dealing with VAT is one of the biggest accounting challenges that businesses face. The law surrounding it is complex, and the sums of money that are involved can be significant. It is therefore easy to get into difficulty with VAT because of administration errors or problems with cash flow. This can be costly to your business in both time and money, so it is important to be as efficient with VAT as possible.
Understand The Key Parts Of The Law
The first step to becoming more efficient with VAT is to understand the key areas of VAT law in relation to your business. This includes whether or not you need to register for VAT, how often you should file, and what rates are applicable to the goods or services that you sell. Remember that very often there is not a single rate to think about – you might have to apply different rates on different products.
A VAT Frame Of Mind
It is easy – and tempting – for businesses to count the gross amount of a sale, but this is dangerous. The VAT portion of the sale is not yours. You are collecting it on behalf of the Revenue. Depending on how frequently you file, the money is retained within your business for a period of time, but you should never consider it as yours.
If you don’t follow this step you can end up with cash flow pressures on your business, brought about whenever you have to pay your VAT bill. If you have been using the VAT portion of your sales for the day-to-day running of your business, you might find you don’t have sufficient funds to pay your VAT bill and cover other expenses, like payroll.
Ideally you should have a separate bank account which is used to hold VAT. Whenever a sale is made you should move the VAT portion of the sale to this account immediately. This makes the administration of VAT easier and less time consuming. It also reduces the pressure on you and your business, and it ensures that VAT is never the cause of cash flow difficulties.
Making mistakes when recording the amount of VAT can be costly, but it is an easy thing to do. We have already established that the system is complicated, so it is important that steps are taken to ensure the accuracy of your data entry. This includes making sure you are using a good accounting software package, and that staff are properly trained.
Finally you should make sure that your business is taking advantage of as many VAT incentive schemes as possible. One of the most common for small businesses is to move to a system of accounting for VAT on a cash receipt basis rather than an invoice basis. This ensures you only pay VAT when you actually have the money, plus it is easier to manage. You can apply to switch to a cash receipt basis for your VAT payments if you have a turnover that is less than €2 million or if at least 90% of your customers are not registered for VAT.
If you need help with VAT in your business contact one of the experts at Gilroy Gannon today.