Postponement of VAT Covid-19 – Lexology
Upcoming VAT payments have been temporarily postponed. All UK businesses are eligible for the deferral, which will apply automatically. Deferred VAT debts will be due in 2021.
What does it affect?
VAT obligations that businesses would otherwise have to pay to HMRC between March 20, 2020 and June 30, 2020 have been postponed until the end of the 2020-21 financial year. This is a deferral of liability, not a waiver, although it is unclear whether interest will be due on the deferred amount.
VAT returns due during this period are apparently unaffected and will still need to be lodged with HMRC. This means that businesses that are in a net recovery position – that is, businesses whose input tax on the expenses they incur exceeds the output tax they must account for on the supplies they they are making – will continue to get their normal refunds from HMRC as usual.
The government estimates that the payment of around £30 billion in VAT that would otherwise have been due by businesses will be deferred under the deal.
Who is eligible?
All UK VAT registered businesses, including corporations, partnerships and sole traders, will be eligible for the deferral. No claim or request should be made to access it, and it will apply automatically.
The reference to “UK” businesses benefiting from the deferral may mean that non-residents registered for VAT in the UK are not eligible, or it may simply mean to be a reference to businesses registered for VAT in the UK – the details of this have not yet been made available. It is possible that the measure will therefore exclude, for example, non-resident landlords who let commercial and retail property to tenants in the UK if the landlord has exercised a tax option in respect of the property . Given the large amount of UK commercial property held by offshore owners (which are now fully taxable on both income and capital gains from UK property), this would be an important caveat. in favor of the postponement.
What is not affected?
The deferral only affects the responsibility to report VAT to HMRC and does not affect suppliers who collect VAT from their customers. This continues to be governed by the terms that the Supplier and the Customer agreed to when they entered into the relevant arrangement, or any deferral that they agree between themselves. Whether or not a supplier is willing to accept a deferral of a customer’s VAT payment will clearly depend on a number of factors, including perceived credit risk and the supplier’s need/preference to have cash needed to fund his own business. (VAT bad debt relief can help suppliers – see below. However, this is only a partial solution if a customer fails to meet what the supplier considers to be the VAT element of the price, as the supplier will have received part of the price and part of the price paid will be treated as VAT for these purposes.)
This means that fully or mostly VAT-exempt businesses such as financial services and healthcare providers have the least to gain from this measure, even though they are in principle eligible for it. These businesses will generally have a minimum VAT payable to HMRC through their returns and will therefore derive minimal benefit from the deferral. Conversely, these businesses may have significant amounts of VAT to pay on third party costs and expenses – unless they can agree a deferral with their own suppliers.
ARE OTHER VAT DEFERRALS AVAILABLE?
These new arrangements will exist alongside HMRC’s existing “payment delay” facility. This allows HMRC to agree a staggered payment plan for business taxes (including VAT), allowing a business to defer payment of specific tax liabilities without defaulting or paying on time and risking further cash flow problems as a result. The payment term can allow deferrals of up to 12 months, sometimes even longer, and has been expanded and improved in response to the Covid-19 outbreak.
It is important to note that a payment delay plan is intended to benefit fundamentally sound businesses that are experiencing or are about to experience cash flow difficulties preventing them from making payment when due. It is not intended for use by businesses that are doomed anyway and will not be able to meet the terms of an installment plan.
Bad debt relief continues to be available for UK VAT. This is available in cases where a business has declared VAT to HMRC on a supply it has made but the customer has not made payment of the underlying price. The debt must have been outstanding for at least 6 months and the debt must have been written off in the company’s accounts before relief is granted.