Upcoming VAT liability payments have been temporarily deferred. All UK businesses are eligible for the deferral, which will apply automatically. Deferred VAT liabilities will be due in 2021.
What does this affect?
VAT liabilities that businesses would otherwise have to pay over to HMRC between 20 March 2020 and 30 June 2020 have been deferred until the end of the 2020–2021 financial year. This is a deferral of the liability, not a waiver, though it is unclear whether interest will be due on the amount deferred.
VAT returns that are due to be filed in this period are apparently unaffected, and will still need to be filed with HMRC. This means that businesses who are in a net recovery position — that is, businesses whose input tax on expenses they incur exceeds the output tax they have to account for on supplies they make — will continue to have their normal refunds paid by HMRC as usual.
The government estimates that payment of approximately £30 billion of VAT that would otherwise have been due from business will be deferred under this arrangement.
Who is eligible?
All UK VAT-registered businesses, including companies, partnerships, and sole traders, will be eligible for the deferral. No claim or application needs to be made to access this, and it will apply automatically.
The reference to "UK" businesses benefitting from the deferral may mean that non-residents that are VAT-registered in the UK are not eligible, or it may mean simply be a reference to businesses registered for VAT in the UK – details of this have not yet been made available. It is possible that the measure would therefore exclude, for example, non-resident landlords renting commercial and retail property to tenants in the UK if the landlord has exercised an option to tax in respect of the property. Given the large amount of UK commercial property that is owned by offshore landlords (who are now fully taxable on both income and capital gains derived from UK property), this would be a material caveat to the benefit of the deferral.
What is unaffected?
The deferral only affects the liability to account for VAT to HMRC, and does not affect suppliers collecting VAT from their customers. This continues to be governed by the terms that the supplier and customer agreed when they entered into the relevant arrangement, or by any deferral that they agree between themselves. Whether or not a supplier is prepared to agree a deferral of a customer's VAT payment to it will clearly depend on a number of factors, including the perceived credit risk and the supplier's need/preference to have the cash to fund its own business. (VAT bad debt relief can help suppliers - see below. However it is only a partial solution if a customer defaults on what the supplier thinks of as the VAT element of the price as the supplier will have been paid part of the price, and part of the price paid will be viewed as being VAT for these purposes.)
This means that wholly or mainly VAT-exempt businesses such as financial services and healthcare providers have the least to gain from this measure even if they are in principle eligible for it. Those businesses will typically have minimal VAT to pay to HMRC through their returns, and so will derive minimal benefit from the deferral. Conversely, those businesses may have material amounts of VAT to pay on third party costs and expenses – unless they can agree a deferral with their own suppliers.
ARE ANY OTHER VAT DEFERRALS AVAILABLE?
These new arrangements will exist alongside HMRC's existing "time to pay" facility. This allows HMRC to agree an instalment payment plan for business taxes (including VAT), allowing a business to defer payment of specific tax liabilities without defaulting on payment or paying on time and risking other cashflow problems as a result. Time to pay can allow deferrals of up to 12 months, or sometimes even longer, and has been broadened and enhanced in response to the Covid-19 outbreak.
Importantly, a time to pay plan is intended to benefit fundamentally sound businesses that are experiencing, or are about to experience, cashflow difficulties preventing them from making payment when due. It is not intended for use by businesses that are bound to fail in any event and that will not be able to keep to the terms of an instalment plan.
Bad debt relief continues to be available for VAT in the UK. This is available in circumstances where a business has accounted to HMRC for VAT on a supply it has made but the customer has failed to make payment of the underlying price. The debt must be outstanding for at least 6 months and the debt must have been written off in the business's accounts before relief is given.
If you have any questions about this measure, or you would like to discuss how COVID-19 is impacting the tax affairs of your business, please contact one of the members of the Tax & Structuring team.