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Mind the VAT - how SMEs can prevent late payments causing a cash flow crisis

Mind the VAT - how SMEs can prevent late payments causing a cash flow crisis

The latest projected figures compiled by the National Institute for Economic and Social Research (NIESR) have raised hopes that the UK can avoid a financial crunch following the EU referendum vote.

According to NIESR, the UK economy is expected to grow by 1.7pc in 2017. While this figure would represent a 0.3pc fall compared with growth in 2016, it would be a far cry from the post-Brexit predictions of a major slowdown.

Such cautious optimism will be taken with a pinch of salt by SMEs who are swimming against a rising tide of tax bills, greater HMRC scrutiny and the longstanding issue of late payments.

*New figures have revealed that British firms owe close to £2.6 billion in overdue VAT, up from £2.55 billion in 2014-15 to £2.59 billion in 2015-16. This small yet significant increase has occurred despite the UK economy displaying green shoots of recovery.

Overdue invoices cause significant financial heartache to businesses as the VAT must be paid irrespective of whether or not the payment has been received. This leaves many firms without the necessary cash flow reserves needed to cover their tax liabilities and drive growth.

It is estimated that almost three-quarters of businesses rely on being paid promptly to avoid a shortage of working capital and are concerned about their ability to stay afloat unless their customers starting paying faster.

Research published by Bacs Payment Schemes highlight that UK SMEs are currently owed an eye watering £26.3 billion, almost half fail to be paid on time with the average late payment debt now standing at £32,185.

The uncertainty around Brexit could have a further knock-on effect should firms choose to delay payments to their own suppliers in order to preserve cash for other areas of their business. 

The consequence of SMEs failing to pay their VAT bill promptly can be devastating. Should HMRC seize a firm's assets to recover the tax it is owed, the actual cost to the business can far outstrip the original VAT bill in the event of the value dwarfing the amount recouped in such sales.

In extreme cases firms may be forced to close if business-critical assets are targeted, such as vital machinery or IT equipment.

VAT returns represent a significant outlay and regularly impact cash flow for all SMEs. Even successful businesses can be hampered by having to make quarterly VAT payments which can restrict working capital that is needed for other important investments to effectively plan for the future.

Leading alternative finance providers, such as Wesleyan Bank, provide specialist funding solutions to enable SMEs to spread the cost of their VAT bills over a 3-12 month period and retain greater control over their finances.

The flexibility and convenience of these tailored solutions is being adopted by an increasing number of SMEs who wish to gain greater predictability over their expenditure and smoothly manage potential peaks and troughs.

The pressure caused by late payments is unlikely to subside any time soon. However alternative finance solutions ensure that SMEs' monthly outgoings can be fixed and their VAT bills can be paid to coincide with HMRC's payment schedules, providing welcome peace of mind in an unpredictable and potentially volatile business environment.

*Overdue VAT figures revealed by Funding Options.

'WESLEYAN’ is a trading name of the Wesleyan Group of companies.

Wesleyan Assurance Society and Wesleyan Bank Ltd are authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Wesleyan Financial Services Ltd, Wesleyan Unit Trust Managers Ltd, Practice Plan Ltd and DPAS Ltd are authorised and regulated by the Financial Conduct Authority.  Advice about investments, insurance and mortgages is provided by Wesleyan Financial Services Ltd.

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