Covid-19: Changes to VAT Obligations

This article refers to the VAT payment deferral scheme which applied from March to June 2020. For recent updates on paying your VAT, please visit the GOV.UK website.

The coronavirus pandemic has been referred to as the greatest public health crisis in a generation, causing disruption and risks to the working practices and everyday lives of billions of people worldwide. As a result of this, businesses across the board are experiencing unprecedented challenges when it comes to their finances, coupled with widespread uncertainty for what the future holds.

New policies introduced by the government, such as the furlough scheme, have provided a much-needed lifeline for struggling businesses. In March, Chancellor Rishi Sunak announced a package of measures designed to support the UK's business community through the pandemic. Temporary changes to VAT payments were also introduced as part of the sanctions, in a bid to help businesses to manage their cash flow. We go into more detail on this matter below.

The basics

UK VAT-registered businesses that have a VAT payment due between 20 March 2020 and 30 June 2020 have two options as part of the government’s new measures:

1. They can defer the payment until a later date
2. They can pay the VAT that is due as normal

As part of the changes, HMRC will not charge interest or penalties on any amount that has been deferred as a result of the Chancellor’s measures, which is good news for those firms worried about the implications of paying later.

It's important to note that only the following payments can be deferred:

• Quarterly and monthly VAT returns payments for the periods ending in February, March and April
• Payments on accounts due between 20 March 2020 and 30 June 2020
• Annual accounting advance payments due between 20 March 2020 and 30 June 2020

Put simply, VAT returns for VAT-registered SMEs still need to be submitted to HMRC by the relevant due date. However, where the due date is between the 20th March and the 30th June, payment does not need to be made until a later date. Businesses were initially given until 31 March 2021 to repay, but in September it was announced that under new HMRC guidelines, they would have the option of repaying in monthly installments until March 2022. No default surcharge penalty will be incurred in relation to the 'late' payment, even if the business is already within the default surcharge regime.

However, SMEs need to keep in mind that the VAT will still be due at the end of the tax year - it's not written off or treated as a grant by HMRC. In addition, the deferral scheme only applies to VAT due to be paid on a VAT return. If the business submits VAT MOSS returns, these will still need to be submitted and paid as usual, as will any import VAT.

During this time, HMRC will continue to process VAT reclaims and refunds as normal, with most repayments being made within five working days. Repayments will not be offset against deferred VAT, but will be offset against existing debts.

Those businesses in a repayment position can apply online to move to monthly returns if this will provide a better option for them in improving their cash flow in the short term.

Companies that do choose to defer their VAT payments as a result of the pandemic do not have to tell HMRC that they are deferring the VAT payment. HMRC cannot interfere with direct debits, so if a business pays by direct debit and wishes to take advantage of the deferment scheme, it will need to ask its bank to cancel the direct debit.

After the deferral period ends, VAT payments is expected to be paid as normal.

No time for complacency

It's crucial that businesses don't forget about their VAT obligations during the deferral period brought about by the coronavirus pandemic. Now's the time for firms to take a step back and ensure that their VAT affairs are in order. Adopting a proactive approach, as opposed to complacency, will help businesses in the longer term.

HMRC has not waived the VAT rules (other than deferral of payment for a set period) and can assess backwards by up to four years for a careless error committed by a business. Whilst the body may not be visiting businesses due to lockdown, once VAT visits restart any SME that has decided to ‘conveniently forget’ about VAT is likely to have a rude awakening.

Where an SME is already VAT-registered, it's even more crucial when times are hard that VAT is accounted for correctly, with care taken to not under-declare VAT. In the long term, this will generate penalties and interest charges, and to ensure that any VAT that can be claimed is claimed as soon as possible.

If an SME has not yet registered for VAT but has a historic liability to do so, it would be worth taking the opportunity to get registered and aim for a first VAT period end and due date within the VAT deferral period, as this will effectively provide an automatic right to a Time to Pay arrangement.

With the extension of the deferral scheme in light of the ongoing disruption caused by the pandemic, it is evident that it will be a long time before business in the UK is able to return to pre-pandemic norms. Until then, it's up to businesses across all industries to adapt to the ‘new normal’, ensuring their processes and operations are in order and that obligations are being met.

About the Author

Tamara Habberley is a Senior Consultant at The VAT People. She has more than 25 years' experience in advising businesses of all sizes, and across all industries, on their VAT obligations. Having previously worked for HMRC, Tamara is familiar with the nuances of VAT, and regularly provides training to businesses in this area.