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How Businesses Can Optimize Cash Flow Through VAT Strategies

How Businesses can use VAT to Improve Cash Flow

In today’s challenging business landscape, maintaining a healthy cash flow is crucial for the survival and growth of companies. This is especially true during times of uncertainty, such as the current COVID-19 crisis. To help businesses optimize their cash flow, there are several VAT strategies that can be implemented. By leveraging these strategies effectively, businesses can not only increase their bottom line but also improve their day-to-day operational costs.

The Importance of Cash Flow for Businesses

Cash flow is often referred to as the lifeblood of a business. It is the measure of cash coming in and going out of a company during a specific period. A positive cash flow indicates that a company has more cash coming in than going out, while a negative cash flow indicates the opposite. Maintaining a positive cash flow is essential for meeting financial obligations, such as paying employees, suppliers, and lenders, as well as for funding business growth and expansion.

VAT Measures for Small and Medium Enterprises

To support businesses during the COVID-19 crisis, Irish Revenue has introduced specific VAT measures targeted at Small and Medium Enterprises (SMEs). These measures apply to businesses with a turnover of less than €3 million that are not dealt with by Revenue’s Large Cases or Medium Enterprises Divisions. However, businesses that do not fall within the SME category can still contact Revenue directly to discuss their current position and explore potential VAT opportunities.

VAT Cost Reduction Strategies

There are various VAT cost reduction strategies that businesses can implement to optimize their cash flow. These strategies focus on improving input VAT recovery and ensuring that businesses are maximizing their VAT savings. By reviewing key business areas and methodologies, businesses can identify potential areas for improvement and make changes accordingly.

Input VAT Recovery Methodology

All businesses should review their current input VAT recovery methodology to ensure that it is optimized for their specific circumstances. This is particularly important for businesses operating in partially VAT-exempt or outside the scope of VAT environments. By accurately determining the percentage of VAT deductible on costs used for VATable and non-deductible activities, businesses can identify additional costs that may be attributable to VATable supplies. This, coupled with an overall change in the basis for calculating the input VAT blockage, can lead to significant improvements in VAT recovery.

Accounts Payable Review

A thorough review of accounts payable can help businesses identify any input VAT that may have been overlooked or under-recovered. Many businesses inadvertently under-recover VAT on certain categories of expenses or fail to identify foreign VAT eligible for recovery. By identifying these under-claimed VAT amounts, businesses can not only reduce future costs but also submit historic reclaims to tax authorities.

Overseas Input Tax Recovery

Foreign VAT often remains unclaimed, despite the availability of efficient procedures to reclaim non-Irish VAT. Irish and EU traders can reclaim VAT incurred in other EU Member States through the Electronic VAT Refund (EVR) procedure. This involves submitting a claim via Revenue Online Services (ROS) within the relevant time limits. Businesses should take advantage of this opportunity to recover input VAT on costs incurred in other EU countries.

Bad Debt Relief (BDR)

Businesses that have written off debts as irrecoverable can claim relief for the VAT paid on the original supply to the defaulting customer. This opportunity is often overlooked by businesses, but it can lead to significant savings, particularly when large debts are written off. It is important to note that if the payment is eventually received, the VAT will need to be repaid.

VAT Cash Flow Strategies

In addition to VAT cost reduction strategies, businesses can implement various VAT cash flow strategies to optimize their cash flow. These strategies focus on managing the timing of VAT payments and maximizing the working capital released as a result.

VAT Grouping

Businesses with considerable VATable costs between related entities can benefit from forming a VAT group. When VAT grouped, the VAT group remitter files a single VAT return per period for the entire group and accounts for any VAT due to Revenue. This eliminates the need to charge VAT or raise VAT invoices on supplies between VAT grouped entities, resulting in a significant positive cash flow impact.


In conclusion, businesses can optimize their cash flow by implementing VAT strategies that focus on both cost reduction and cash flow improvement. By reviewing their input VAT recovery methodology, conducting accounts payable reviews, exploring overseas input tax recovery, and taking advantage of bad debt relief, businesses can reduce costs and improve their VAT position. Additionally, by implementing VAT cash flow strategies such as input tax accrual, VAT grouping, VAT56B authorization, and considering tax points, businesses can release working capital and improve their overall cash flow.

It is important for businesses to assess their specific circumstances and consult with VAT experts to identify the most suitable VAT strategies for their organization. By doing so, businesses can navigate these challenging times and optimize their cash flow for long-term success.

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