The COVID-19 pandemic caused the most severe challenges to UK businesses in modern times. The government implemented measures to help alleviate the financial strain. A primary measure was the suspension of VAT payments, a much-needed lifeline for businesses grappling with cash flow. In this post, we’ll examine the specifics of the VAT deferral scheme and its extension. As well as how businesses can best manage their repayment options with practical advice from HMRC.
Background on the VAT Deferral Scheme
In March 2020, as lockdown and economic turmoil became fully entrenched, Chancellor Rishi Sunak introduced a VAT deferral period. This is under which employers who were VAT registered could defer VAT payments due between 20 March 2020 and 30 June 2020. This automatic relief did not need to be applied for, and supported around 2 million VAT paying businesses. This saves more than £30 billion in tax deferment. No payments were due from businesses during that time, though everything was required to file a VAT return promptly. Deferred amounts did not accrue interest or penalties, which was a welcomed forgiveness during a period of limited certainty.
The extension also applied to VAT payments on account that were due between 20 March and 30 June 2020 and to various payments (including PAYE) for month 4 of 2019/20. This also incorporated payments on account for businesses on the VAT Annual Accounting Scheme or Payment on Account Scheme. But it didn’t apply to import VAT, VAT MOSS payments, or other taxes, such as customs duties. Companies paying by direct debit were recommended to cancel their mandates immediately to avoid automatic collections.
Extension of the Deferral Scheme
In recognition of this continued financial pressure, the government has extended this support through a New Payment Scheme for VAT deferral. It was announced as part of the Winter Economy Plan’s package of support measures and made public on 24 September 2020. Rather than repay the full amount by 31 March 2021, businesses would be able to choose to make 11 smaller interest-free monthly repayments. The online service for this facility opened on the 23rd of February 2021 and closed on the 21st of June 2021, businesses had to apply to join and also set up a direct debit. Those who couldn’t use the online service (e.g. because they can’t pay from a UK bank account or where there are joint signatories) were to call HMRC’s COVID-19 on 0800 024 1222 for other options.
There were a few requirements for businesses wanting to sign up to the scheme:
- Have postponed VAT payments between 20 March and 30 June 2020.
- Have a track record for VAT returns over the last four years.
- Understand the specific balance owed, and any amounts already paid.
- You set it up via direct debit, as agents could not opt in on behalf of clients.
Those who do not pay in full or sign up to the scheme may face a 5% levy or interest on any unpaid deferred VAT. This can be referred as which HMRC is treating as a debt. A further penalty was introduced by the Finance Act 2021 for unpaid deferred VAT which overrode the generic default surcharge.
Practical Steps for Businesses
Businesses affected by HMRC Deferral – Repayment Planning
• Companies should be ready to pay back loans early to avoid penalties.
• Cash forecasting and management are key.
• Discussing payment plans with a versed accountant is advisable.
Handling Direct Debit Issues
• They may have problems with HMRC kicking money out accounts if a Direct Debit (DD) had not been cancelled.
• Refunds or claims for indemnity can be received through the coronavirus helpline or bank.
• HMRC bank details received should be kept up to date to prevent delays
Further Assistance:
• Businesses with late repayments can make case-by-case repayments through HMRC’s Time to Pay scheme.
• Alternatives include moving to monthly VAT returns, reviewing VAT cash accounting scheme. It also includes accounting for VAT only on payments received.
Correcting VAT Mistakes
• Businesses must complete and file Form VAT 652 to HMRC’s VAT error correction team.
• Corrections received after 31 December 2020 may not be included in the deferred VAT balance.
VAT Payments under CBM Guidance:
CBM Consultants facilitates UK businesses with VAT returns both by registering businesses on time and aiding them in the legal calculation and loss/debit submission of their VAT under the regulations of HMRC. Our experts advise businesses on VAT schemes (Flat Rate, Standard, Cash Accounting), reconcile input and output VAT, and save money by not making costly mistakes or, penalties. We also help with digital compliance under Making Tax Digital (MTD), support establishing good bookkeeping practices and advise on cash flow planning, such as how to reclaim any applicable VAT and avoid being out of pocket.
Strategic Considerations
It offered industries some short-term relief, but they’ve got to maintain and use that time to be financially stronger. As CBM Consultants explains, good forecasting and cash flow management have been the biggest help for the best chances of survival in the pandemic. The extension until March 2022 provided a reprieve for businesses, but those able to pay earlier should pay early to avoid bigger payments later, particularly as the prospects for economic conditions are unclear.
Professional advice was especially helpful for businesses that are at risk of default on repayments. Companies including CBM Consultants provided help with VAT compliance, forecasting and making sure businesses weren’t overpaying. They also offered to help navigate some HMRC processing, such as the re-establishment of direct debits for post deferral payments and the reclaim of refunds for incorrect collections.
Conclusion:
The VAT deferral scheme was a crucial support package, but it should be used prudently to avoid cash flow problems. Repayment terms include full payment by 31 March 2021, joining the VAT Deferral New Payment Scheme before 21 June 2021, and spreading payments over 11 months until 31 March 2022 interest-free. Unfulfilled deferred VAT could result in 5% penalties. Professional support from Your Accounting Team can help monitor cash flow and address alternative relief options.
