Many SMEs in the UK have been dealt a savage blow by the pandemic. Although the recent easing of restrictions has opened up large swathes of the economy for the first time in over a year, many businesses are still reeling from the effects of COVID-19. At a time when revenues have been squeezed dry, many businesses have faced cash flow crises, and struggled to meet their obligations to HMRC. For VAT registered businesses, this includes paying their Value Added Tax bills.
Fortunately, the new VAT payment deferral scheme has enabled businesses to kick the proverbial can down the road a little and preserve their precarious cash flows. The new VAT deferral scheme closed in June 2021. If you have entered the scheme, it’s important to understand how VAT deferral works and your obligations to HMRC. So you can be assured of harmonious future cash flows and avoid unpleasant surprises.
Let’s take a look.
The new VAT payment deferral scheme - how it works
The new payment scheme was established in February 2021 to help businesses that, due to the pandemic, were unable to make their VAT payments without placing their business finances in peril.
Under the scheme, companies can break down the deferred balance for VAT payments due between 20 March 2020 and 30 June 2020 into interest-free monthly instalments. Businesses are allowed to choose the number of monthly instalments they want to make (up to a maximum of 10 for those who joined the scheme before April 2021). All instalments must be paid by the end of March 2022.
The maximum number of instalments your business can choose depends on when you joined the scheme.
Businesses that joined by 21 April 2021 can make ten payment instalments
Businesses that joined by 19 May 2021 can make nine payment instalments
Businesses that joined by 21 June 2021 can make eight payment instalments
Your first instalment needs to be paid when joining the scheme, with subsequent instalments required to be made in consecutive months. Applications opened to businesses in February 2021 and closed on 21 June 2021.
As a requirement of joining, businesses are expected to be up to date with their VAT returns, have a Government Gateway account, and be able to pay by direct debit. Because of this, businesses are expected to set up the scheme themselves. Agents such as accountants cannot do this for them.
What you need to do after signing up
It’s too late for new applicants to sign up to the VAT deferral scheme. However, if you’ve already signed up to the scheme it’s vital that you understand what to do next.
If you were unable to sign up to the scheme, and cannot pay your outstanding VAT liability, you need to contact HMRC to try and arrange alternative repayment options. Failure to do so is likely to result in penalties.
If you feel that you may be able to settle your VAT payments earlier, you may wish to reduce the number of instalments to improve future liquidity. It’s absolutely imperative that you orchestrate your cash flow in order to make your deferred payments.
While deferred payments are not subject to the usual 5% penalties, new legislation currently making its way through the House of Lords will provide new penalties specifically for missed deferred VAT payments.
We can help
If you’re interested in finding out more about VAT deferral, managing your post-pandemic cash flow, or any other aspect of your business finances, then get in touch with our financial experts. Find out how GoCardless can help you with ad hoc payments or recurring payments.