On the 26th of March 2020, the Government announced as part of the support packages for businesses affected by Covid-19, that any VAT registered business could defer payment of the VAT due for that quarter, if the payment was due between the 20th of March – 30th of June 2020.

This means that for VAT quarters ending 29th of February, 31 March and 30 April 2020, you can choose to not pay your VAT due for those quarters until the 31st of March 2021 and not be charged any penalties.

VAT Returns still must be submitted by the usual quarterly deadline, even if the payment is deferred.

At first glance, this is an ideal way of freeing up cash in your business. However, deferring your VAT is not a decision that should be taken lightly.

For those who pay VAT every quarter, it’s a painful outflow of cash because the VAT you collect sits in the company bank account, unless you have a separate bank account just for VAT and Corporation Tax (which we highly recommend).

The key point we make to our clients about VAT, is that the money collected is not theirs. If you are VAT registered, you are collecting on behalf of HMRC, taking off a bit of VAT your company has incurred on expenses (or applying the flat rate percentage for those on that scheme) and passing the bulk of what has been collected on to HMRC.

This is why choosing to defer your VAT payment, needs to be carefully considered. It’s not the same as dipping into your reserves you’ve saved, or your Corporation Tax money you have put aside. It is effectively borrowing from HMRC’s money you have collected, interest free, until the 31st March 2021.

For many company owners, deferring their VAT payment, will be the first type of conscious debt decision they have made in their business. It is easy to forget you owe the debt, if you do not receive monthly bookkeeping reports from your accountant, that reminds you it is due.

Who is the VAT deferral ideal for?

As a short term solution, for those businesses that have had their income dry up overnight due to Covid-19 and are confident it will return when the lock down is lifted, then dipping into funds reserved to VAT to meet company expenses is a good idea because it is an interest free solution to meet a short term cash flow issue.

However, it is imperative that you do not forget you owe it and aim to pay it back as soon as your income returns. Or alternatively, set up a direct debit payment to the HMRC VAT account to pay it back in monthly instalments so it is all paid off by the end of March 2021.

If you are in the fortunate position, to have healthy reserves and continued income throughout the Covid-19 period, you need to decide what the benefit is to deferring VAT.  If you are used to operating your company with minimal debt, then it is better to pay it, to operate as per normal. This also helps to put your company in a better position for any future lending down the line, should you need to look at this option.

https://www.gov.uk/guidance/deferral-of-vat-payments-due-to-coronavirus-covid-19

For more helpful advice and tips on how to run your VAT registered company, in the most tax efficient manner, please get in touch with us on 01268 786 960