Better Languages usually steers clear of political debate. However, the Conservatives have recently trumpeted the idea of helping SMEs by deferring VAT. Good idea? We think not…
It is inevitable during times of economic downturn that politicians look for quick fix solutions. However, we feel strongly that the ability to defer VAT payments wouldn’t help cash flow. It has the double wammy of worsening cash flow for the exchequer at a stroke.
Why is this? Most small businesses are able to account for VAT using cash accounting. This means that you only pay VAT to the Revenue once you receive it. If you have received money from customers, then it is physically sitting there when you need to pay it over.
All deferring payment does is artificially boost your cash flow by deferring liability. At best this is a short term measure. It will give an artificial boost to some struggling small businesses. At worst this will tempt businesses in a poor cash flow position to get into a worse mess. Remember the proposal is only deferral, the VAT will still have to be paid.
We actually think that the current VAT system works pretty well. If anyone wants to make a real difference for small businesses, they need to input real money. They could even make real improvements to the tax system. Unfortunately they appear to be focused on sound bytes which don’t make any real contribution.