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Managing VAT during the COVID crisis

Last year the Government announced unprecedented VAT measures to help relieve pressure on businesses affected by a slowdown in trade caused by Covid-19. Earlier this year the Government introduced a payment instalment plan that extended the deferral period for a further year as well as extending the reduced rate of VAT for the catering and hospitality sector.

In April 2021 HM Revenue & Customs (HMRC) announced that business that have not agreed payback arrangements with HMRC by 30 June 2021 could face a 5% penalty and/or interest charges.

1. Paying 2020 deferred VAT by instalment

At the start of the COVID crisis, VAT payments due to be paid to HMRC between 20 March 2020 and 30 June 2020 were allowed to be deferred. The amount deferred was in most cases one quarter’s VAT return payment and this was orginally required to be settled in full by 31 March 2021. The Government later announced that all VAT registered taxpayers who took advantage of the deferral could opt to make 11 equal payments over the 2021-22 financial year instead of paying it off in one lump-sum at the end of March 2021. This means that the VAT is not fully paid back until March 2022.

Businesses need to formally apply for the instalment regime via HMRC’s website and must to so before 31 March 2021 to take full advantage of the 11 month payment plan.

Alternatively, if you submit the request before 21 April, 19 May or 21 June, you can still pay by instalments but these are reduced to ten, nine or eight monthly payements repectively so that all deferred amounts of VAT are settled by March 2022.

The instalment payments for deferred VAT will of course be in addition to any normal VAT liabilities that fall due for payment on current and future VAT returns.

Given the drop-off in trade during the pandemic, many businesses may have switched to monthly VAT returns to accelerate VAT refund claims. While VAT returns remain in a repayment position businesses may wish to continue with monthly VAT returns or switch back to quarterly VAT returns when trade picks up again and regular payments to HMRC resume.

Where businsses are unable to make VAT payments due to lack of funds caused by COVID 19 (and these are not covered by the deferral installment arrangements) businesses should contact HMRC as soon as possible and negotiate specific Time to Pay arrangements and also be prepared to make a case for reasonable excuse where unavoidable and unforeseen circumstances have led to a default and possible penalties.

2. Duty deferment account holders and registered importers

Businesses that held a duty deferment account (DDA) and Registered Importers who do not hold a deferment account, were also allowed to defer Customs Duty and Import VAT due between 20 March and 30 June last year. However, this was not automatic and needed to have been applied for, outlining the reason for the deferral request and explaining the financial hardship that would otherwise be caused. Unlike VAT return payments, deferral relied on HMRC’s discretion. Businesses that took advantage of this deferral should now be contacting HMRC to negotiate an instalment plan if required.

With the introduction of Postponed Import VAT Accounting on 1 January 2021, having a DDA now only benefits the payment of import duties. Businesses with significant duty costs should still consider making an application for a DDA as this will provides a cash flow benefit of up to 45 days by deferring the payments of duty from the time goods are cleared through Customs to the fifteenth day of the following month. Hence goods can be imported and sold potentially before any import duty falls due.

3. Extension of 5% VAT rate

In the March 2021 budget there was a welcome announcement with the Government extending the temporary 5% VAT rate for qualifying restaurant and hospitality services, holiday accommodation and admission to attractions until 30 September 2021.

Perhaps more surprising, there will also be an interim rate of 12.5% for such services from 1 October 2021 with the VAT rate not returning to 20% until 1 April 2022.

These reduced VAT rates will help eligible businesses in one of two ways. It could provide financial support if they decide to keep prices the same and retain the VAT reduction as additional income. Alternatively, it allows businesses to pass on some or all of the VAT reduction to their customers in order to stimulate consumer spending and increase the business turnover. It should be remembered that whether the VAT rate cut is passed on to the consumer is a commercial decision for the business.

Would you like to know more?

If you would like to discuss any of the above issues or have other queries about how you can make the right decisions for the future of your business and your income, please contact your usual Blick Rothenberg contact or one of the partners to the right.

You can also visit our Coronavirus – Practical Guidance for businesses today Hub for our latest insights and sign up here to receive important Practical Guidance updates delivered directly to your inbox.