Deferred VAT deadlines on the horizon
Businesses that deferred VAT payments during the early stages of the pandemic which remain outstanding need to act by the end of June in order to avoid penalties – and by 21 June if you want to benefit from any further deferral.
To support businesses during the pandemic, VAT payments due between 20 March 2020 and 30 June 2020 were able to be deferred. In total, around £33.5bn of VAT payments were deferred in this way.
Businesses were not required to make VAT payments during the deferral period, and were instead initially given until 31 March 2021 to pay any liabilities which accumulated.
However, it was later announced that, rather than paying in full at the end of March 2021, a new payment scheme would be launched allowing businesses to further defer their payments.
Paying the deferred VAT - what are the choices?
Businesses that deferred VAT payments last year effectively have three options when it comes to repayment:
pay the deferred balance in full;
sign up for the new payment scheme (see below); or
contact HMRC if you need more time to pay.
These options come with two important deadlines which businesses need to be aware of.
Firstly, applications for the new payment scheme will close on 21 June 2021. Any business wishing to further spread their repayments therefore needs to sign up by that date.
Alternatively, in order to avoid a penalty, businesses need to either pay their deferred VAT in full, or contact HMRC to arrange more time to pay by 30 June 2021.
What are the possible penalties?
The usual default surcharge rules for late paid VAT do not apply to deferred balances. Instead, clause 99 and Schedule 19 of Finance Bill 2021 (which is currently making its way through the House of Lords) provide for a new penalty specifically in respect of unpaid deferred VAT.
This penalty is set at 5% of the deferred VAT outstanding if businesses have not opted into the new payment scheme, paid in full, or made an alternative arrangement to pay by 30 June 2021.
Somewhat confusingly this means that, despite the terms of the original deferral stating payment had to be made in full by 31 March 2021, taxpayers actually have until 30 June 2021 to pay their deferred balances or ask HMRC for more time to pay.
The VAT deferral new payment scheme – how it works
The new payment scheme allows businesses to pay off their deferred balance in monthly instalments interest free.
Taxpayers can select the number of monthly instalments they wish to make (up to a maximum level) but all instalments must be paid by the end of March 2022.
The maximum number of instalments available to a business is determined by when you join the scheme.
If a business has not yet signed up for the scheme, the maximum number of instalments available to them will be eight.
The first instalment is payable at the time of joining the scheme, and we understand from HMRC that subsequent instalments have to be made in consecutive months.
Applications for the new payment scheme opened in February this year, and will close on 21 June 2021 as noted above.
In order to join, businesses have to be up to date with their VAT returns and be able to pay by direct debit.
As the scheme requires a direct debit to be set up, businesses must opt in themselves and agents cannot do this on their behalf.
Before opting in, businesses must:
create their own Government Gateway account if they don’t already have one;
submit any outstanding VAT returns from the last four years;
correct errors on their VAT returns as soon as possible;
decide the number of equal instalments they wish to make;
make sure they know how much they owe, including the amount originally deferred and how much they have already paid; and
be ready to make their first instalment payment.
If a business wants to join the new payment scheme, but cannot use the online service (for example because they do not have a UK bank account, can’t pay by direct debit or have dual signatories on their account) they should contact the COVID-19 helpline.
What to do next
Businesses with outstanding deferred VAT balances need to decide quickly whether they will be in a position to pay HMRC in full by the end of June.
If they will not, and they can meet the 21 June sign up deadline, they should consider applying for the new payment scheme.
However, if that deadline has been missed, or the business cannot join the scheme (for example because they have outstanding VAT returns), then in order to avoid a penalty they should contact HMRC as soon as possible, and by 30 June at the latest, to discuss alternative payment options.
More information on the new payment scheme, including how to contact HMRC if a business need more time to pay can be found on HMRC.gov.uk and their guidance on repaying deferred VAT due to COVID-19.