The Scope of the VAT deferral Scheme
The Chancellor announced a deferral of VAT payments to help support businesses with cash flow during the Covid-19 pandemic.
The deferral provisions only cover VAT payments that are due alongside normal VAT returns which are to be made between 20 March and 30 June 2020.
- a VAT liability relating to VAT returns for periods ending 29 February 2020, 31 March 2020 and 30 April 2020.
- payments on account due under the VAT Payments on Account Regime in this period
- any advanced payments due under the Annual Accounting Scheme in this period
VAT returns must still be submitted in the normal way and deferring a VAT payment is optional.
Using the deferral
No application or HMRC approval is required to defer VAT but if payment is normally made by Direct Debit this must be cancelled. It is recommended you contact your bank to cancel your Direct Debit as soon as you can but at least 5 working days before the return or payment is due.
HMRC have confirmed they will not charge interest or penalties on any amount deferred.
If you choose to defer your VAT payment the current HMRC advice is that you must pay the deferred VAT on or before 31 March 2021. We expect further information about how to pay deferred VAT will be issued shortly.
What is not covered by the deferral arrangments
At present, the deferral arrangements only cover payments due before 30 June 2020. The payment for the VAT period ending 31 May 2020, is due on 7 July 2020, so this and later returns currently fall outside of the scheme.
HMRC expect that any payments, under Time to Pay arrangements in place for amounts originally due before 20 March 2020, will continue to be made. If COVID-19 is making it difficult to meet these obligations you can contact the dedicated helpline mentioned below.
The following are also excluded from the automatic VAT deferral scheme:
- Import VAT and Customs Duty
- Payments due under the VAT MOSS system
- Payments due as a result of adjustments to earlier returns such as HMRC assessments or Notices of Error Correction
- Machine Games Duty
- Insurance Premium Tax
HMRC dedicated helpline
HMRC has put in place an enhanced Time to Pay offer to fit the specific impacts of Covid-19. Time to Pay is available to all businesses and individuals who are in temporary financial distress as a result of Covid-19 and are unable to pay their tax on time or have existing liabilities.
HMRC has set up a dedicated helpline to enable those eligible to get practical help and advice which can be reached by calling 0800 024 1222.
The helpline is open from 8 am – 4 pm, Monday to Friday only.
HMRC will discuss your specific circumstances to explore:
- agreeing an instalment arrangement
- suspending debt collection proceedings
- cancelling penalties and interest where you have administrative difficulties contacting or paying HMRC immediately
Repayments and refunds
Any repayments reclaimed on VAT returns will be processed as normal by HMRC. Many repayments are made without checking and are made relatively quickly, often within 5 working days. Some claims can be selected for checking prior to repayment, in this case, repayment can be delayed while HMRC undertakes reasonable enquiries.
HMRC will, however, offset VAT repayments against existing debts accrued before 20 March 2020. This is not limited to VAT debts but can include other taxes such as PAYE, and Corporation Tax.
There are a number of steps that can be taken to reduce your VAT liability or improve your cash flow. These include:
If your business is likely to be in a repayment position you can ask to change to monthly VAT returns. This will allow VAT repayments to be claimed more quickly.
If VAT has been declared and paid to HMRC on invoices that remain unpaid it may be possible to reclaim the VAT paid under the VAT Bad Debt Relief scheme. There are a number of conditions for making a claim, including that the debt has been written off in the VAT accounting records and it also has to be six months overdue.
If a Bad Debt claim is made it may be advantageous to make the claim on a VAT return where payment has not been deferred. Care does need to be taken as there are time limits for making Bad Debt claims. The claim has to be made within the latter of four years and six months from the time of supply or payment date.
It is also the case that if VAT has been reclaimed on a purchase or expense that has not been paid within six months the VAT you have reclaimed may have to be repaid.
Correcting errors on previous returns
If you have overpaid or underclaimed VAT on previous returns errors under £10,000 can be corrected on a VAT return. Alternatively, you can submit an Error Correction form and request any refund is separately repaid by HMRC.
As a temporary measure, HMRC is not accepting error correction forms by post. Instead, these should be submitted by email to firstname.lastname@example.org
Primarily due to an office move and IT systems issues, HMRC has been experiencing severe delays in processing error correction forms. If a delay in processing an error correction will cause financial hardship a submission can be labelled ‘URGENT’ in which case HMRC will attempt to prioritise the claim. To assist HMRC, additional evidence about the financial hardship position should be provided when sending in details about why the error occurred.
We also understand that HMRC has been unable to process error correction notifications to amend VAT returns that have been digitally submitted to HMRC under Making Tax Digital and are working on a solution.
How an error made on previous returns is adjusted could have an impact on the speed of any refund and should be carefully considered.
Change of schemes
If you are using a scheme, such as the Flat Rate Scheme where VAT payments are based on a percentage of income but VAT cannot be reclaimed on most expenses, it may be worth reviewing whether it would be beneficial to continue using the current scheme.