Food firms advised to defer VAT payments on kit to free cash flow

17-May-2017 - Last updated on 18-May-2017 at 11:15 GMT

Food manufacturers should defer VAT payments to free up cash flow, advises Ben Guy

Food manufacturers are being advised to defer VAT payments on equipment purchases to free up much needed cash flow.

Finance companies were starting to realise the “significant burdens” VAT bills were putting on small and medium-sized enterprises and, in certain circumstances, were loaning the VAT on purchases for up to three months, according to Ben Guy, md of Beacon Asset Finance.

“Buying new machinery is expensive, and getting progressively more so with each passing year,” Guy explained.

“The good news is that finance companies have started to recognise the issue. Many have acknowledged that rising price tags and VAT bills are now putting significant burdens on companies looking to grow.”

Cut the initial cost

Guy acknowledged that higher purchase (HP), which could cut the initial cost to as little as a 10% deposit, remained a viable option.

However, he explained that a £40,000 piece of kit bought on HP would still cost £12,000 upfront – £8,000 of that would be on VAT payments the business wouldn’t see again for a long time.

Deferring the VAT as well would mean just £4,000 being due upfront, Guy said. Then, after a few months, once the VAT was reclaimed, that money could then be used to pay off the VAT part of the loan, he added.

“These loans aren’t an option for every company, but then not every business has the same cash flow pressures,” Guy said.

‘Cash flow obstacles’

“Deferment is best suited for companies with seasonal business models – food manufacturers on longer payment terms with the big supermarkets or packaging firms that buy much of their materials upfront. Those types of firms that have bigger cash flow obstacles than most.”

However, any business that can argue the VAT payment due on its next investment would significantly affect its cash flow, without there being an underlying cash flow problem in that business, could be eligible, Guy added.

“It will cost a little bit more, with the cost spread across the duration of the HP agreement. But monthly payments are preferable for many when given the choice, and predictable monthly outgoings are easier to manage and account for than big, one-off outlays,” said Guy.

“And, as with any HP agreement, the new piece of kit can still go on the books as an asset from the day the invoice is signed. The cost is spread, and the cash flow looks a whole lot better. VAT deferment just has to be requested, as most finance companies don’t offer it unless asked.”