During this hard time for businesses, here are a few points to help you consider your VAT liabilities and cash flow
Managing Cash flow
The Chancellor announced that businesses would not be required to make VAT payments due between 20th March 2020 and 30th June 2020. However, this scheme only defers the VAT liability. The deferred VAT must be paid to HMRC before 31st March 2021.
The scheme also applies to VAT payments on account and annual accounting advance payments due between 20 March and 30 June 2020. The deferral does not apply to import VAT or VAT due under the MOSS system.
Remember to cancel your direct debit to HMRC if you wish to defer liabilities.
Timing of invoices
Most businesses calculate their output VAT due based upon invoices issued, not invoices paid unless the business is using Cash Accounting.
Timing of the invoice issued can help you with managing cash flow. Invoicing at the start of the month rather than the end of the month will allow your business to gain time to collect the VAT before the VAT has to be paid to HMRC.
For example, if a business with a quarterly VAT return to 31 May invoices its customers on 31 May, the VAT on those invoices is payable to HMRC by 7th July.
However, if that same business issued its invoices on 1 June, the VAT should be declared on the VAT return to 31 August, and is payable to HMRC by 7th October.
By moving an invoice point by one day, the business has legitimately delayed their VAT liability by 4 months.
Late submission of VAT returns
If your business is going through financial difficulty and will not be able to pay its full VAT liability on time, your business must submit their VAT returns on time. If your VAT return is not submitted, HMRC will estimate your business’s liability and calculate any surcharges based on this estimated figure. HMRC’s estimate can never represent the true VAT liability and therefore your business must submit its VAT returns on time to avoid these surcharges.
Even if you are using the VAT deferment scheme announced on 20th March 2020, the VAT returns must be submitted on time.
Default Surcharge Penalty
Many businesses are already struggling with their cash flow and would like to explore other options after the VAT deferment scheme period ends.
Late VAT payments penalties are applied under the default surcharge regime. The first VAT late payment will have no penalty charged; however, your business receives a ‘Surcharge Liability Notice’ (SLN) which is a warning and start of a 12 month period in which any late VAT payment will receive a penalty.
Once an SLN has been issued, any subsequent late VAT return will lead to a penalty of 2% of the late paid VAT and the SLN is also extended for a further 12 months. Penalties for subsequent late VAT payments will rise to 5% for the second, 10% for the third and then 15% for the fourth and future defaults. The 12 month SLN period is extended each time a default occurs and only comes to an end when the business has submitted and paid 4 quarterly VAT returns on time.
The 2% and 5% penalties are not levied by HMRC if the penalty is less than £400 and there is a minimum charge of £30 for the 10% and 15% penalties.
Avoid default surcharges
Only with a reasonable excuse would your business be able to mitigate their default surcharge liability/penalties. Therefore, the best option for your business is to call HMRC’s Covid-19 Time To Pay unit before the VAT payment is due and agree a payment plan for the VAT liability.
HMRC will consider requests on a case by case basis and may be able to agree an instalment arrangement, to suspend debt collection proceedings and cancel penalties and interest. HMRC have a dedicated Covid-19 helpline – 0800 024 1222 and further information can be found at the following link: https://www.gov.uk/difficulties-paying-hmrc
Please contact Naveen Sahney at firstname.lastname@example.org if you would like help with your VAT cash flow or a time to pay arrangement with HMRC.