Legal to borrow money from the debt to the Taxman?

[nfoote]

Following numbers are simplified to make things clearer but imagine a situation as such;

MyCo receives payment for 1000 plus 17.5 VAT
So total in MyCo bank accounts is 1175
For simplification's sake, assume there a NO expenses/bills/salary
At some point VAT of 175 and CorpTax of 210 must be paid.

If I were to purchase business equipment to the value of 1000 then CorpTax is reduced to 0 and bank account falls to 175, enough to cover VAT owed.

My questions are;
A) When is the VAT due? Monthly or Quarterly? Or does it depend on when MyCo's financial year is?
B) Is it legal / possible to purchase business equipment instead to the value of 1100?

Am I right in the following assumptions?
1) CorpTax is reduced to 0 for this month and also reduced a further 21 next month as MyCo will still be in a operating loss?
2) Although the bank account would be below the 175 owed in VAT, assuming next months invoice is paid in ok the bank account will again be able to cover the VAT debt, also assuming there are no further equipment purchases next month.

Do you see where I'm getting at, is it LEGAL to effectively borrow money from the debt owed to the VAT man to purchase things this month and pay back the debt to the VAT debt next month before the VAT debt is called in? Or would this not be possible because VAT must be paid before next months invoice is likely to be paid?

And yes I am aware that even if legal its a risky thing to do, what if ClientCo never pays never months invoice etc etc.

[Clare@InTouch]

VAT is usually quarterly, although you can apply to file annually. If you're a large company you file monthly (highly unlikely to apply to you).

There's nothing wrong with buying business equipment or incurring expenses, even if it reduces your CT to zero. If it creates a loss then that loss is carried forward to your next accounting year.

You can spend the company money when you like, as long as you have enough to pay the VAT when it becomes due. If not, you'll have to explain to HMRC why you can't pay and agree a payment plan. There's nothing illegal about this, but it's obviously not good business practice and will put you on HMRC's radar.

You could always work on a cash accounting basis for VAT, that way you only pay the VAT to HMRC when it's actually paid to you. Useful if you think there's a risk of bad debts.

[craig1]

Easiest/safest way to treat VAT is to pretend it doesn't exist in the short-term. As it comes in, stick it in a reserve account and forget about it. At the end of each quarter reconcile your VAT return with the VAT you've stuck in the reserve account and bank any remaining. In the example given, that'd mean your month one current account balance would be £1000, not £1175 with the £175 going into a reserve account until the end of the quarter.

Some aggressive money-use theories will suggest using every penny coming in and paying just-in-time but for me that's dangerous and risks you getting a late payment fine and drawing the "Eye of Hector" onto you if your agency has a hiccup in paying an invoice.

[Wanderer]

If I were to purchase business equipment to the value of 1000 then CorpTax is reduced to 0 and bank account falls to 175, enough to cover VAT owed.

If you turn over 1000 + vat and you then spend the 1000 on equipment (presuming it's not zero rated for vat) then you can claim the vat back on your return so you probably don't have to pay anything. Infact, if your company borrows money (eg, a director invests money in the company) then the VAT man will pay VAT to you as a refund...

Do you see where I'm getting at, is it LEGAL to effectively borrow money from the debt owed to the VAT man to purchase things this month and pay back the debt to the VAT debt next month before the VAT debt is called in? Or would this not be possible because VAT must be paid before next months invoice is likely to be paid?

There is nothing to stop your company spending money set aside for tax if the directors decide that is what they want to do. As you acknowledge, it's a risky business though.

You also have to watch that you don't end up trading while insolvent. This only really applies if you take a wad of money out of the company and it goes bust a short time later though.

[Scrag Meister]

Easiest/safest way to treat VAT is to pretend it doesn't exist in the short-term. As it comes in, stick it in a reserve account and forget about it. At the end of each quarter reconcile your VAT return with the VAT you've stuck in the reserve account and bank any remaining. In the example given, that'd mean your month one current account balance would be £1000, not £1175 with the £175 going into a reserve account until the end of the quarter.

Some aggressive money-use theories will suggest using every penny coming in and paying just-in-time but for me that's dangerous and risks you getting a late payment fine and drawing the "Eye of Hector" onto you if your agency has a hiccup in paying an invoice.

WCS

As soon as an invoice is paid I transfer the VAT to my tax account, ready for paying to HMRC when I do my return.

Never spend the VAT money, it's not yours. If you're on FRS (Flat rate scheme) then you'll get a couple of hundred per quarter in the companies hand.