Law firms face the same quarterly cash flow frustration.
The average lock-up for UK law firms is 146 days. But as VAT payments often fall long before a client invoice is settled, this can put unwanted strain on finance teams and Managing Partners when deadlines appear.
With cash cycles already filled with complexity for firms as they juggle seasonal gaps with growth plans, meeting VAT liabilities shouldn’t have to add to the cash flow struggle. Instead, they should form a key part of wider law firm finance planning.
This article delves deeper into the reasons behind these timing mismatches and how the right VAT funding solutions can help firms meet obligatory deadlines, without operational or financial disruption.
When VAT is due before invoices are settled
Most law firms will operate using the standard VAT accounting scheme (also known as accrual basis or invoicing accounting), which means they must pay VAT to HMRC when an invoice is issued, regardless of when their client actually pays them. This is due to the turnover thresholds that exceed accounting limits.
While simple in practice, this means HMRC will need your VAT payment made within your next quarterly return, even if you’re stuck in lock-up.
When lock-up periods begin to extend beyond 60 to 90 days, law firms may experience a cash flow gap causing them to dip into reserves, halting business matters and causing daily operational disruption.
The financial impact on cash flow
Imagine a mid-size law firm provides an invoice for £100,000 in June. The client doesn’t pay them until September, but their quarterly VAT return is due in July. HMRC still requires the firm to make their £20,000 VAT payment on time.
With law firms often experiencing seasonal spikes in activity, bulk invoices in lock-up can fall at once, regardless of when their next VAT return is due.
For small-to-mid-sized law practices, it only takes a couple of delayed client payments in lock up, before their cash flow is impacted.
Combined with seasonal renewals, such as Professional Indemnity Insurance, increased overhead costs and rising pressure to grow, factoring VAT funding solutions into financial planning can help firms to smooth out those gaps caused by lock-up.
Using VAT funding solutions for smoother cash flow
VAT funding solutions have become a large part of funding for law firms. Designed to bridge the gap between VAT return deadlines and client payments, they provide structured repayment periods during which firms can spread the cost of their VAT return over a period of time, such as 3 to 12 months.
It’s a small solution that keeps liquidity predictable and mitigates the risk of firms having to draw into overdrafts or reserves. It ensures they can meet HMRC deadlines, avoid fines, and keep capital free for larger business priorities and growth plans.
While it can be used as a short-term measure during unexpected delays or extended billing periods, it shouldn’t be seen as a panic button.
As VAT return cycles recur at the same time every quarter, their predictability means that a VAT loan facility can easily be woven into longer-term financial planning around known deadlines, giving Managing Partners and Finance Directors more control when it comes to repayment schedules and financial forecasting.
Aligning VAT funding solutions to your billing cycles
Aligning VAT funding solutions to known billing cycles can turn reactive finance management into more strategic planning that doesn’t give firms the admin headache.
If your firm knows the VAT liability is coming up, putting VAT funding solutions in ahead of time ensures that you can meet HMRC deadlines automatically, even if large client payments are still outstanding. Having more predictable cash flow then eases the pressure for firms as they balance partner payments, salaries and other operational overheads and not have to compromise.
Adding this into your planning provides more cash flow management. It gives leadership teams increased year-round visibility, rather than the last minute uncertainty.
Other ways you can reduce VAT pressures
VAT funding solutions can be an effective strategic option when used as part of a holistic approach to planning.
In addition to financing, firms can also look at:
- Reviewing alternative accounting methods, such as the cash accounting scheme, when VAT is only due after payment
- Integrating digital VAT tools to help better forecast cash flow and improve visibility of upcoming payments
- Establishing stricter payment deadlines with clients, or encouraging earlier payments to help settle invoices sooner and reduce lock up
All of these practices when used can help create a better financial picture for firms.
Building a more proactive VAT management strategy
VAT should make up a key component of law firm financial planning and not just be a last-minute afterthought.
Firms can include VAT forecasting into regular reporting by:
- Reviewing upcoming bills
- Acknowledging upcoming settlements
- Planning for any VAT returns a quarter ahead;
This helps VAT deadlines become less disruptive and a more managed, predictable part of the business. Working with a finance partner who understands the legal industry’s complexities of regular billing delays and sporadic spikes in activity can ensure your firm gets the right VAT funding solution that fits around your business needs and VAT cycles.
In summary
VAT returns will always occur – what matters is how you manage them.
Proactive management, combined with tailored VAT funding solutions, can help law firms retain control and visibility of cash flow, meet HMRC obligations without the risk of fines, and plan ahead with confidence.
If your firm regularly experiences cash flow strain around VAT deadlines, have you considered finance options to help? Get in touch with Shire Professions Finance today to discuss how we can help you plan ahead, protect cash flow, and keep your law firm moving forward, no matter what your next bill is.