Have you considered… cash accounting for VAT?
HMRC have just reissued an updated version of Notice 731, which explains the cash accounting rules for traders who charge VAT. If you are a trader and suffer from cashflow problems when you have to pay the output VAT on yoursales before you have actually received all the payments, this may be a good time to consider a switch, particularly as the revised Notice (linked below) is written with a commendable clarity rarely found in documents issued by HMRC.
To summarise, the cash accounting scheme is designed to help businesses manage their cash-flow evenly by assessing income for VAT when the customer has actually paid a bill, as opposed to at the date on the invoice – which is the normal method for assessing VAT. The corresponding disadvantage of using the scheme is that you can only reclaim the input VAT incurred on your purchases after you have actually made the payment. Note that your taxable supplies must not be expected to exceed £1.35m in the accounting period for which you wish to use cash accounting.
If you have problems with bad debts or have credit agreements with customers, the scheme may be more suitable than normal VAT accounting. It will be less advantageous if you typically receive payment as soon as you make a sale, or in particular if you usually reclaim more VAT than you pay (I.e. if you tend to buy more than you sell). You can switch between methods at the end of an accounting period, but not within it.
If you already use the cash accounting scheme, note that the revised guidelines include changes to the accounting rules for cheques, credit card payments and payments collected by third parties (see paragraphs 4.4 to 4.5 and 5.2 to 5.3.