Accountants initiate corporate finance discussion as VAT holiday ends

Accountants initiate corporate finance discussion as VAT holiday ends

Businesses clamber for advice ahead of 2021 VAT tax bill

Accountants initiate corporate finance discussion as VAT holiday ends

The VAT holiday period announced by HMRC in March ended today. Businesses will have until March 31, 2021 to pay their VAT bill deferred between March 20 and June 30 this year. As a result, accountants are now advising clients on how to prepare ahead of paying their VAT bill next year – particularly those struggling with cash.

 “In business, your cash flow is negative because you’re probably paying wages before you’re getting paid by your customers. It’s trying to establish to them where that pinch point is, if they’ve got a negative cash flow to make profits for the future now and if they will be able to afford the VAT,” says Richard Grimster, partner at Price Bailey.

“It’s more of a corporate finance type discussion with them and then we’re looking at other taxes and time to pay arrangements and saying ‘if this VAT is for sure due, what about planning around your corporate tax, using all of the available reliefs and claims that you can make and asking the revenue for time to pay if you require it on other taxes to help with the cash flow.’ We approach it as a kind of tax exercise rather than a VAT exercise in isolation.”

The Institute for Fiscal Studies (IFS) estimates that five percent of deferred VAT will not be paid back to HMRC due to businesses going into insolvency.

“Almost certainly – that [VAT 2021 payment] will be the pinch point. At the moment, businesses probably have a lower VAT liability if they have been adversely affected. For example, if their sales have gone down significantly, their current VAT bill won’t be very big but the March VAT bill they deferred may have been pretty unimpacted if it was January, February, and March sales,” says Grimster.

“We’ll be applying the usual scrutiny and I think the impact will really be felt in March when it’s the latest time they can pay back their June quarter VAT – that would be when businesses are really affected,” he adds. “If banks aren’t lending or there’s no other support, then no doubt some businesses that are close to the brink will just be tripped over because of that.”

“There will be a large number of businesses that won’t be able to survive,” says David McGeachy, partner at Saffery Champness.

According to an HMRC spokesperson, approximately 640,000 businesses that file quarterly will face the July 7 deadline. Due to the slowdown of economic activity, HMRC is unable to estimate the actual number of businesses that will have to make VAT payments – but it is “likely to be significantly lower than the 640,000 that are required to file,” said the spokesperson, via email.

The July 7 tax bill will also be the first “big test,” for businesses, according to McGeachy. “They’re going to have to come up with cash on sales they’ve invoiced, and they may not necessarily be able to collect the debt from their customers.”

He adds that it “would have been helpful,” for small and medium-sized businesses who are due to pay their VAT bill next month, to have the May quarters included in the deferral period.

Accountancy firms are also enhancing their outsourcing offering to meet their clients’ needs, explains Grimster.

“Lots of our clients have approached their business models by saying that they need to change and need a slightly more flexible cost base, but lots of them have looked at outsourcing quite recently. That might be outsourcing some of their finance function. Some of the work that we’ve been doing with clients to prepare for this is saying ‘is now a good time for you to reassess whether you employ staff or keep your bookkeeper and do your VAT work in-house?’” he says.

“What we’ve been trying to put in place for our clients is a kind of enhanced outsourcing offering, making sure that we’ve got all the people with the right skills to be able to step in if either they’ve got their finance team that has been furloughed, so they’ve got less resource and they need help with discrete projects like VAT filings, or if they’re looking at restructuring their finance team and reducing – permanently leaning on their accountants for their outsourcing help.”

McGeachy says filing VAT invoices during lockdown was a difficult task due to offices being shut.

“There is a concern with lots of people not able to get to their offices and workplaces. We are concerned that clients are not able to get hold of VAT invoices, for example, that you’re supposed to have to be able to substantiate and claiming VAT on your costs,” he says.

Resources & Whitepapers

How to optimise your compliance lifecycle

How to optimise your compliance lifecycle

12m
The new rules of accounting

The new rules of accounting

1y
5 ways internal productivity can boost your profitability

5 ways internal productivity can boost your profitability

1y
Crushing the Four Barriers to Growth

Crushing the Four Barriers to Growth

1y