For many business owners, receiving a VAT bill feels like a nasty shock—suddenly, there’s a large amount to pay, and cash flow can take a hit. But VAT isn’t a surprise tax. It’s 20% of your sales, every quarter, and the key to avoiding stress is simple: don’t treat it as working capital.
Your VAT bill isn’t an unexpected cost – it’s money you’re collecting on behalf of HMRC. The sooner you separate it from your business funds, the easier it is to manage.
VAT Is Not Your Money – Don’t Spend It
When you invoice a client for £1,000 plus VAT, the total invoice is £1,200 – but only £1,000 belongs to your business. The extra £200 is VAT that you’re holding for HMRC.
Many businesses make the mistake of leaving VAT in their main bank account, using it to cover expenses, and then struggling to find the money when the quarterly VAT return is due. Instead, get into the habit of moving VAT straight into a separate account so it’s there when you need it.
How to Avoid VAT Bill Shock
1. Open a Separate Tax Savings Account
Set up a dedicated business savings account specifically for tax. This is where you’ll transfer your VAT, corporation tax, and any other tax liabilities, so it’s not sitting in your main bank account tempting you to spend it.
2. Transfer VAT Weekly or Monthly
Each time you receive a payment that includes VAT, transfer the VAT amount to your savings account. If you prefer, set up an automatic weekly or monthly transfer of 20% of your VATable sales into this account.
This way, when your VAT return is due, the money is already set aside – no stress, no panic.
3. Calculate Tax Obligations Regularly
Don’t wait until the end of the quarter to check how much VAT you owe. If you’re using accounting software like Xero, QuickBooks, or FreeAgent, you can check your VAT liability in real-time.
By reviewing your VAT position weekly or monthly, you’ll always know what’s coming and can adjust if needed.
4. Review Quarterly to Stay on Track
At the end of each VAT quarter, use reports from your accounting software to ensure you’ve set aside enough. If your business is growing and VAT payments are increasing, you may need to adjust your weekly or monthly transfers.
5. Plan for Other Taxes Too
VAT isn’t the only tax you need to set aside money for. Your business will also need to pay:
- Corporation Tax (19-25% of profits)
- PAYE & National Insurance (if you have employees)
- Self-Assessment Tax (if you take dividends)
A good rule of thumb is to set aside around 30-40% of your profits for tax in a separate account. It’s better to have too much than too little.
Action Plan: Stay in Control of Your VAT & Tax
- Set up a separate savings account for VAT & tax
- Schedule weekly or monthly VAT transfers (20% of VATable sales)
- Use Xero or other software to track VAT in real-time
- Review quarterly to ensure you’re setting enough aside
- Never use VAT for working capital—it’s HMRC’s money, not yours
Final Thoughts
VAT shouldn’t be a shock. By managing it properly, setting aside money regularly, and tracking your liability, you’ll always be prepared when the bill is due.
If you need help getting organised with VAT, cash flow planning, or accounting software setup, we’re here to help.
Call us on 01386 366741 or visit accountancyoffice.co.uk to book a consultation.