VAT deferral scheme: know the deadlines and your options

Businesses need to take essential steps before – and after – the VAT deferral new payment scheme closes

There’s just one month to go before the closure of HMRC’s VAT deferral new payment scheme. That means businesses that deferred VAT payments last year have until just 21 June 2021 to join in order to pay in eight monthly instalments. The online portal, which opened on 23 February, will be closed from this date.

The VAT deferral payment scheme was first announced by Chancellor Rishi Sunak as part of the government’s £350 billion Winter Economy Plan, and aims to help businesses spread the cost of VAT payments over a longer period of time.

According to HMRC, more than half a million UK businesses deferred £34 billion in VAT payments. Businesses could either opt to pay VAT by 21 March or, if they were unable, they could make use of the VAT deferral payment scheme.

Here are the basics of the scheme.

  • Any businesses that previously deferred VAT payments between 20 March and 30 June 2020 is allowed to pay VAT in smaller, more manageable amounts, interest-free,
  • Any businesses that join the scheme by 21 June can pay deferred VAT in eight monthly instalments.

For eligible businesses that, for whatever reason, have been unable to sign up to the online service by the 21 June cut-off date, have been advised to ring the HMRC coronavirus helpline on 0800 024 1222 to join the scheme by telephone. In these circumstances, businesses have until 30 June 2021. This is also the absolute latest cut-off dates businesses can contact HMRC if they need help with paying their VAT.

Businesses should be aware they could be charged a 5% penalty (plus interest) if they do not either:

  • Join the scheme online by 21 June, or
  • Pay in full by 30 June.

We asked accountants what advice they could give to businesses. Here is what they had to say.

Make the most of the scheme now – or face penalties later

Debra Dougal, VAT partner and head of UK VAT advice, Haslers Accountants

Businesses that deferred their VAT payments between 20 March and 30 June have until 21 June 2021 to apply to pay their liability by instalments. The VAT deferral payment scheme opened on 23 February 2021 and applicants that signed up in the first three weeks were able to pay in 11 monthly instalments, whereas those joining between 20 May and 21 June will have eight monthly instalments. Payment in full is required by February 2022, and the first instalment is required to be paid on joining.

Importantly, failure to sign up by 21 June will render businesses liable to settle their full liability by 30 June 2021 and either a 5% penalty or interest on the amount outstanding may be charged.

Next steps: Our advice is therefore to sign up for the scheme and make the first instalment payment. If you are unable to meet a subsequent monthly instalment, contact HMRC at the earliest possible opportunity to discuss alternative debt management arrangements.

If you are unable to make an initial instalment payment of an eighth of your outstanding liability, you should contact HMRC to negotiate a Time to Pay Arrangement without delay. Also important is to note that the deferral payment scheme is not available to businesses with outstanding VAT returns in the previous four years.

Verdict: Sign up before the 21 June deadline and make the first instalment, or businesses will have to pay VAT in full by 30 June.

Contact HMRC if further help is needed, for VAT payments and other tax debts

Jane Stacey, VAT director, Mercer & Hole

The VAT deferral payment scheme gave initial relief for businesses at the beginning of the pandemic. Now that it is ended, businesses need to factor in paying that VAT at a time when the outlook is still uncertain, and many businesses are struggling after more than a year of disrupted trading.

Businesses that cannot pay the deferred VAT in full can join the VAT deferral payment online by 21 June 2021.The repayment scheme allows for the outstanding deferred VAT to be paid in monthly instalments up to March 2022. 

It is worth remembering that entering into this repayment scheme does not prevent you from also entering into arrangements for other tax debts, so if you are struggling to pay further VAT bills, you should call HMRC on 0300 200 3835.

Businesses should also ensure that VAT is not paid earlier than necessary by taking advantage of the new postponed VAT accounting for imports, ensuring you are claiming all input VAT you are entitled to and not bringing forward output VAT by invoicing early.

Next steps: Businesses needing further help to pay should contact HMRC on 0800 024 1222, a dedicated helpline, by 30 June 2021. If there is any amount left outstanding after 30 June 2021, then penalties of 5% may be charged.

Verdict: Ensure VAT is paid on time, but do contact HMRC ASAP if there are payment issues relating to VAT or other tax debts.

Prepare regular cash-flow forecasts to help mitigate impact of repayments later on

Donna Torres, director of small business, Xero 

The VAT deferral payment scheme, and other government support measures, have been supporting SMEs during this uncertain time. However, businesses need to be thinking about the financial impact of paying back deferred payments.

Like with any type of deferral scheme, the main issue in prolonging payments is that it impacts cash flow for the longer term, so businesses need to be preparing for the impact of repayments. Forecasting regularly, factoring in changes to VAT payments to future cash-flow projections and working with an accountant on mapping a payment plan is essential.

Next steps: It’s important to keep your financial records up to date more generally and monitor cash flow more often than usual to avoid any nasty surprises that could impact your ability to repay. Using a cloud accounting platform will help to streamline the process and keep a firm grip on your numbers in real time.

Verdict: Prolonging payments through deferral schemes can impact cash flow in the long term, so businesses should prepare regular forecasts to help mitigate cash-flow impact of repayments later on.

Reduce or remove unnecessary expenses and plan ahead to ensure financial obligations can be met

Scott Craig, partner, VAT, Azets

The VAT deferral payment scheme has provided a welcome cash-flow saving at a time when income was reduced and businesses had competing cash-flow pressures. It has undoubtably meant that some businesses were able to continue to operate and did not face the prospect of closure. That said, not everyone chose to use the scheme, as they were concerned that the deferral could impact on them at a later date.

In order to prepare from a cash-flow/financial perspective, businesses must ensure that they have enough funds to meet all of their financial obligations. They need to be realistic and plan ahead as far as they can. They should ensure that all unnecessary expenses are reduced or removed. They need to ensure they are certain of all income sources. They should undertake VAT housekeeping to ensure that their VAT position is up to date – for example, take advantage of bad debt relief on unpaid sales – but remember that unpaid purchases may result in an additional VAT cost under the same rules. 

Next steps: If your business is struggling to meet the next round of VAT payments after the scheme closes, don’t ignore problems. Contact HMRC and negotiate/agree realistic Time to Pay Arrangements.

Verdict: Businesses must be realistic and plan ahead as much as possible by reducing or removing unnecessary expenses to ensure all financial obligations can be met in the future.

Annie Makoff is a freelance journalist and editor.

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