‘Pay now or pay later,’ but don’t forget it’s a debt

‘Pay now or pay later,’ but don’t forget it’s a debt

UK Chancellor’s VAT extension will help businesses survive during crisis, but it remains a debt, warn accountants

‘Pay now or pay later,’ but don’t forget it’s a debt

Accountants are being forced to remind clients that HMRC’s VAT deferral will end and payments will need to be made.

“The VAT deferral scheme is one of the things that will help some of those businesses stay alive along with several the other government support measures, but it’s just a deferral. It’s a situation that still must be dealt with next year,” says Julie Palmer, partner at Begbies Traynor.

“Businesses need to remember that it helps now, in terms of the emergency cash reserves, but looking forward 12 months’ time, they will have to face a period where the normal VAT liability needs to be paid. It’s survival for today – it’s not a debt that is going to disappear, it will need to be replaced at some time and it’s important not to forget.”

The deferral of VAT payments announced by the chancellor in late March came as a relief for SMEs struggling to maintain cash reserves – a measure also welcomed by accountants.

“The coronavirus time-to-pay hotline, announced in the Spring Budget, was becoming overloaded with businesses ringing up to agree deferment of taxes with waiting times to speak to someone at HMRC creeping up to two hours,” says Tim Stovold, head of tax at Moore Kingston Smith.

“The automatic deferment of VAT payments without having to seek specific agreement from HMRC took some of the pressure off this hotline and freed up time for the individuals to focus on running their business rather than waiting on hold for HMRC to speak to them.

“There are a number of our clients, particularly those involved in e-commerce where their business has suffered no downturn, who are able to make the payment without any hardship so are just paying it as normal,” he adds.

Several businesses have also opted for monthly repayments due to fear of not being able to repay a single colossal tax bill.

“There are other clients who don’t want to store up problems for the future if they can be avoided so would rather make the payment now to avoid a double payment in the future when this catches up with them. For those that have been forced by their own circumstances to take the deferment, more than a few are planning to repay the VAT in instalments over the next few months so they avoid the catch-up payment hitting them in one go later,” says Stovold.

UK VAT registered businesses that have any VAT payment due between March 20, 2020 and June 30, 2020 now have the option to defer the payment until March 31 next year, with no penalties or interest cost.

HMRC updated its guidance on April 27 as it stated that businesses will only be able to defer payments made quarterly and monthly for period ending in February, March and April.

VAT registered businesses that choose to defer their tax returns payment are not required to notify HMRC but will need to cancel their direct debit.

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