Businesses have taken advantage of the VAT and income tax deferment schemes to ease pressure on their finances. But come next April, will they have the cash to pay it?
As businesses started to feel the pressure due to COVID-19, the government announced that businesses had the option to defer VAT and income tax payments to ease the pressure on their cashflows.
Under the VAT scheme, UK VAT registered businesses with a VAT payment due between 20 March 2020 and 30 June 2020 have the option to defer payment to a later date – no later than 31 March 2021. Income tax payments can be deferred to 31 January 2021.
Many businesses have taken advantage of the scheme, but as the lockdown continues, questions are arising around their ability to pay it come 2021. Accountants in practice give their predictions on how big an issue this will be.
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With a recession looming, Q1 2021 threatens disaster
Chris Conway, director and co-founder, Multiply Accountancy
There’s going to be a disaster situation come March next year.
A lot of businesses have kicked these payments down the line, and you’ve got to consider what has been kicked as well.
With VAT, you’ve got any payments between 20 March and the end of June, so if your payment was due on 7 June, that’s an April quarter, so you’ve probably had a terrible six-eight weeks, so your liability is likely to be smaller.
But if you’re at the earlier end of that window – your payment was due on 7 April – worst-case scenario and you’re a Christmas trader, you’ve just had the biggest quarter of your year. That becomes a nightmare, when you’re thinking about a potential recession coming.
Most of the businesses that are deferring VAT are having to defer VAT – they have to live hand-to-mouth. That’s probably a business where profits pay the owner’s wages. So how are they going to accrue surplus cash to pay back the VAT? I don’t think that they’re going to. I think it will be a very interesting time 12 months from now, when people are trying to arrange their time-to-pays, because they can’t pay the VAT.
Companies are taking these measures – tax deferment, CIBILS – then they’re just sitting there, they aren’t cutting their overheads. They’re hoping that things will just return to normal. Imagine a lot of people will end up paying their salaries with the income they bring in and will then go bust. I’ve already had some very difficult conversations with clients that will struggle to pay their VAT next year. We’re trying to help them manage it day-by-day.
Next steps: There isn’t much you can do, except make sure people know what’s coming – many businesses will have to take on more debt and will need to have some time-to-pay discussions.
Verdict: Businesses will struggle to pay their deferred VAT and income tax, and need to face reality now. and need to face reality now.
HMRC will be lenient so VAT deferment doesn’t cause issues
Rana Zubair, owner, Apex Accountants
I have a few clients who have deferred their VAT payments.
I think the lower amounts they will have to pay in subsequent quarters will compensate for the deferred quarter.
I don’t think that many will struggle to pay. I don’t think HMRC will pursue the businesses that will struggle to pay the VAT amount in full very aggressively.
HMRC has recently suggested that they aren’t going to take businesses to tribunal for the recovery of this VAT, so I think where there are any issues with payment, I think businesses will be able to reach a manageable arrangement with HMRC if needed.
HMRC has already relaxed VAT rules on things such as PPE, medical equipment and pharmaceuticals, so businesses in healthcare and pharmaceuticals will also have their VAT reduced.
Some clients have applied for a Bounce Back Loan, with no repayment in the first year.
They are using this to pay off their VAT debts and trying to repay as much of the loan as possible in the interest-free period.
Businesses will definitely keep monitoring their income and ensure that they are accruing VAT, but I believe it won’t be as big an issue as it might seem.
Next steps: The approach will vary from business to business, but we’re spending time to work out tailored plans and advice for each client.
Verdict: While some businesses will take on debt to pay off their VAT, it won’t be a big problem come the end of the VAT deferment period.
VAT deferment is a massive help, but needs management
Stuart Hurst, Regional Director,
Accounts and Legal
The deferred VAT payment was a massive relief for a lot of businesses when the craziness and uncertainty began.
The lockdown caught people and businesses off-guard; there was a feeling it was coming, but when it did come, it was very sudden.
A lot of clients had VAT bills of between £10,000-£20,000 on average, and they were the ones that were hit hardest. Companies with larger VAT bills tended to have larger cash reserves and more of a contingency plan.
The vast majority of owner-managed businesses have taken deferment, and it has created a significant amount of breathing space.
There’s still a concern for the future for those business owners, however. A lot depends on how quickly things recover.
Being able to stagger payments is great, but there’s still a need to catch-up. A lot of planning is needed on the cashflow.
We’re finding it’s still about looking at the next three months to ensure [clients] can keep their heads above water until we come out of lockdown.
While there is some long-term thought about how that VAT bill will be paid, things are changing and moving so much that it’s hard to look too far ahead.
We’re trying to plan with clients and ensure there is a saving mechanism there to ensure VAT payments can be paid. It’s very difficult.
There will still be businesses who will enter the first quarter of 2021 in a very precarious position in terms of their cash flow. The Bounce Back Loan Scheme is great and very easy to access, but again, it still needs to be paid back.
Editor’s note: Stuart has just moved jobs, and his comments mostly refer to his previous role as head of UK head of cloud accounting at UHY Hacker Young.
Next steps: Help clients manage cashflows, do a lot of hand-holding, and encourage them to take the bounce back loan where needed.
Verdict: The VAT deferment scheme is a great lifeline, but the situation is still precarious.
Mark Rowland is a journalist and former editor of Accounting Technician and 20 magazine.