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  • Writer's pictureLindsey Spurway

Reverse charge VAT 5: A penny saved is a penny earned

>> VAT Reverse Charge comes in on the 1st March 2021 <<

When it comes to paying tax, there's a simple rule of thumb.

Something so simple and obvious many overlook it.

It's a rule that applies to any business that pays VAT.

And it's the subject of today's small business tip ...

Put your VAT income into a separate account.

This way, when it comes to paying your VAT bill, you have the money to hand.

Simple, right?

The last thing you want to happen when it comes to paying your VAT bill is to not have the money to hand.

And to incur late payment fines while you try and pull the cash together.

I read something a little disturbing that made me question whether everyone is following this simple rule.

It was on the website of a well-known accounting software vendor.

It's written in regard to the upcoming Reverse charge VAT change.

Here's the line:

'This [Reverse charge VAT change] change may impact your cash flow. If you are a subcontractor then it’s likely your short-term cash flow will be impacted as you will no longer be receiving the VAT payment from your customer.'

The issue I have is with the second line regarding the negative impact to your short-term cash flow.

It suggests it is common practice to count the VAT amount as part of your income.

Yet, as I have written above, this is a mistake.

Better practice is to count the total before VAT as income then set the VAT amount aside in another account.

This ensures you will have no trouble paying your bill when the time comes.

I realise there may be extenuating circumstances at times - but sticking closely to this rule will reduce the number of headaches in future.

You incur tax, you save away the amount you owe. Simple.

Best, Lindsey

P.S. If you need any help bringing some order to your finances and administration drop me an email.

We've helped over 54 clients keep their business in good order and have room for just one or two more.

P.P.S. If you've not yet had a chance to watch our video on Reverse charge VAT, it's well worth 2:09 minutes of your time.

P.P.PS. Don't forget to look back at some of our other articles in the Reverse charge VAT series:


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