MILLIONS of pounds are being wasted by small companies who do not know how to manage their tax liabilities, a Midlands financial advice firm has said.

Halesowen-based chartered accountants and business advisers Nicklin said it believes scores of Midlands firms are among the thousands of companies UK-wide failing to take advantage of a range of legal measures designed to reduce their tax liabilities.

“Smaller companies could actually use the tax system to their advantage but surviving the current downturn in activity and the credit crunch requires that we all increase our level of financial fitness,” said Nicklin partner Harvey Owen.

Businesses can gain substantial cash benefits by adopting special VAT schemes such as Cash Accounting and Flat Rate schemes.

Unlike standard VAT accounting, where VAT is due when the business issues an invoice, the cash accounting scheme works on the principle that firms do not have to pay VAT until they have been paid by their own clients. Hence, a company turning over £1.2m and having debtors of 90 days could delay the payment of VAT amounting to more than £50,000. This may be the saviour for some businesses.

The flat rate VAT scheme is designed to help small businesses reduce the amount of time spent accounting for VAT.

The percentage is less than the standard VAT rate because it takes into account that VAT on purchases cannot be reclaimed.

The self-employed should also take a look at tax payments being made on account - if profits are falling they may be able to reduce payments to take account of these lower profits. Companies making losses are able to set these back against profits of the previous year. A call to HMRC may allow this at the time payment is due for that earlier year.

Mr Owen added: “I’m not sure the Government would appreciate businesses reducing their tax take but these are perfectly acceptable tax opportunities that companies must consider.”