Today has not been a good day for British Retail. Both Toys R Us and Maplin have announced that they are now in administration. Both of these are largely as a result of failing to keep up with changing markets, but in the case of Toys R Us in particular, there would also appear to have been a screaming case of financial mismanagement. A Sky News report gave the primary reason for their demise as the fact that they couldn’t pay a £15m VAT bill, following a poor Christmas sales period.

For a business the size of Toy R Us, the VAT payment should never have been available to be spent for anything other than the VAT bill.

Even a just-registered business should know that the VAT it collects is not its money!

A business collects VAT on behalf of HMRC, and failure to pay it over as due is not just financial mismanagement, but a criminal matter.

Whilst some small businesses can be forgiven for not realising that VAT is dealt with in this way, a business the size of Toys R Us should know better, and should have had financial guidance to ensure that the basics were managed properly.

This report may of course prove to be untrue, and even without financial mismanagement the leadership team could not have hoped to thrive given the apparent lack of drive, that has left the business looking dated and tired. If there is any truth in it though, the odds were severely stacked against the business ever surviving. The inevitable post mortem will shed more light on the subject, but it ‘s likely this wasn’t the only basic financial principal to be ignored.

For all businesses the mantra is simple:

1. When you receive payment of your invoices, tuck the VAT element away.
2. Do not dip into it to pay the bills, or for anything else.
3. Ideally, tuck the money into a separate account, to reduce the temptation to artificially bolster the coffers.

It really can bring your business to its knees very quickly if you don’t have the funds to pay the VAT bill when it is due. HMRC are unlikely to show any leniency as they may for any other taxes.

If you’d like some advice around the best way to protect your VAT funds or manage your cash flow without  the need to dip into the VAT pot, do get in touch, but please don’t fall into the Toys R Us trap!