HMRC continues to remind taxpayers that the period for deferring VAT payments is set to end on 30 June 2020. Amounts due after this date will need to be paid in full and direct debits should be reinstated. But as with most tax measures, there will be winners and losers. Gavin West, Head of VAT and Indirect Taxes at Smith Cooper considers the repercussions.

“The initiative to help businesses manage cash flow in the lockdown period is due to end shortly. The current message emblazoned across HMRC websites suggests that the deferment period may not be extended and that businesses will be required to start paying their VAT liabilities again. This is likely to be effective from 7 July 2020 when the majority of VAT payments for the period ending 31 May 2020 fall due.

This does create issues for different businesses, however. Although the deferment period lasted roughly 3 months (a typical VAT period), not all businesses will have received the same level of relief.

For example

A large business with a VAT reporting period ending 28 February will have been able to defer two quarterly VAT liabilities (31 March and 30 June). However, compare this to a small or medium sized business that operates on a cash accounting basis that has the same reporting periods.

Although it may have been able to defer its VAT payment due 7 April it will be required to pay in full VAT due for period ending 31 May as this does not fall due to 7 July, after the end of the deferment period. It may not have traded in this period but spent the lockdown period chasing debtors for older invoices to be settled. Under cash accounting rules, VAT falls due on the receipt of payment meaning that this will need to be paid to HMRC and cannot be deferred.

Clearly the above scenario may be outside the norm, but there is a potential issue in that businesses have simply not generated sufficient cash during the lockdown period to meet their VAT liabilities. As the saying goes, ‘Cash is King’ and debtor days will no doubt have increased in the current climate as all businesses seek to maximise cash flow.

It will therefore be interesting to see how HMRC react. The Government needs to find the balance between generating revenues and stimulating the economy. Will HMRC therefore take a sympathetic approach and allow businesses to enter time to pay arrangements in the coming months? Or will they seek to enforce payment?

We would hope for the former. The Government is unlikely to want to be seen to instigate insolvencies immediately after ending a relief measure, assuming it has thought this through…

It is more likely that time to pay arrangements will be considered on an individual basis. HMRC may ask more questions when negotiating arrangements rather than simply giving carte blanche as before, and evidence may also be required to determine how further deferrals may affect a business’ ability to pay amounts already deferred to March 2021.

As mentioned earlier, cash is king, and businesses should therefore carefully consider their long-term position with regards to paying tax liabilities. Entering into longer, formalised deferment agreements with HMRC now could provide some benefit in these uncertain times and provide a degree of headroom over the short term.”

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Alternatively, for more tailored advice, please can get in touch with one of our experts to discuss your business’s respective VAT position specifically. We will be happy to help.