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HMRC internal manual

# Examples and forms: examples of calculating the cash flow advantage of a manipulation

## Introduction

This section is referred to at VATAC5400.

The formula for calculating cash flow is best illustrated by the following examples.

## Example 1

• Company N is on stagger 2 (periods ending on the last day of April, July, October and January)
• Company P is on stagger 3 (periods ending on the last day of May, August, November and February)

Company N supplies management services (VAT £50,000) to company P once per quarter and raises an invoice on 1 May which is declared on their July return, being paid by 31 August. Company P receives the invoice on 1 May and recovers the input tax on its May return which is submitted on 30 June. The cash flow benefit exists between 30 June (when the tax is effectively recovered by company P) and 31 August (when the tax is paid by company N). Therefore, over a three month period, the cash flow benefit is for two months.

The formula for calculating the cash flow benefit is:

Total tax charged multiplied by Period of the benefit multiplied by 6 per cent interest per annum

The cash flow benefit will therefore be:

£50,000 multiplied by 2 months divided by 12 months multiplied by 6 per cent equals £500 per quarter.

## Example 2

Same companies as , but this time the supplies made were as follows from company N to company P.

 1 May £50,000 1 August £135,000 1 November £67,500 1 February £36,750

In each case, the cash flow advantage lasts for two months per quarter (as in the example above).

The cash flow benefit is:

Total tax charged multiplied by Interval of benefit multiplied by 6 per cent interest per annum

 £50,000 multiplied by 2 months divided by 12 months multiplied by 6 per cent equals £500 £135,000 multiplied by 2 months divided by 12 months multiplied by 6 per cent equals £1,350 £67,500 multiplied by 2 months divided by 12 months multiplied by 6 per cent equals £675 £36,750 multiplied by 2 months divided by 12 months multiplied by 6 per cent equals £367.50

## Example 3

Same companies as in and except that there is only one supply of management services per annum made on 1 May by company N, upon which the VAT is £50,000 with the same two month benefit before the output tax is declared by company P.

Cash flow benefit is:

Total tax charged multiplied by interval of benefit multiplied by 6 per cent interest per annum

£50,000 multiplied by 2 months divided by 12 months multiplied by 6 per cent equals £500.00 per annum.