It's great news for many UK businesses. In a long-anticipated update, Chancellor Rishi Sunak announced an extension for companies that deferred their VAT because of the COVID-19 pandemic. Back when the virus first prompted lockdowns and the furlough scheme, the government came up with measures designed to remove some of the financial strain and allowed businesses to defer VAT until March 2021.
In a move that acknowledges the challenges still facing thousands of enterprises and sole traders in the UK, the Chancellor has now designed an extension that will allow affected organisations and individuals to spread the repayment of that VAT between March 2021 and 2022.
The pandemic hit the UK pretty hard and reasonably fast. It seems like a long while ago right now, but when COVID-19 arrived, all VAT-registered businesses got offered the option of deferring payments, resulting in more than half a million entities delaying over £30 billion worth of VAT.
The scheme applied to VAT which became due between the 20th March and the 30th June 2020, and businesses got until the 31st March 2021 to pay. HMRC also waived interest charges and penalties for any deferred VAT payments under the scheme. The original measures were always a response to the onset of the effects of the pandemic. However, it's long been suspected that another round of help would be required to get many businesses through the financial impact of COVID-19.
The original VAT deferral scheme allowed thousands of businesses to cope temporarily, but the route out of COVID-19 was never going to be quick or easy to navigate. The strain of keeping cash flowing and employees on the books has been substantial for many ventures. The March 2021 deadline for paying deferred VAT kept on looming, and this latest announcement will prompt a sigh of relief from business owners all over the country.
It's in everyone's interests to retain as much employment as possible during the pandemic, and this move is the latest in a suite of changes designed to help companies stay afloat. It's also hoped that delaying repayments now will allow businesses to get to the other side in better shape.
Instead of being required to pay all of any deferred VAT by March 2021, the Chancellor will now allow affected businesses to repay the amount over the course of twelve months. You'll essentially split the figure into monthly repayments and spread the impact. That means if you get to March next year with a VAT bill of £55,000, you'll get to make payments of $5,000 for eleven months.
If your business is facing difficulties paying deferred VAT relating to the period between March and June this year by March 2021, speaking with an experienced accountant about getting your business involved in the scheme should help you manage the situation. The government has said that businesses wishing to register need to opt in; however, the mechanism for that hasn't been made available yet. It's a good idea to start planning for those repayments now, regardless of a delay in the registration process.
If you'd prefer and are able to make deferred repayments by March 2021, you'll need to make sure direct debits get reinstated in good time, but you won't need to do anything else. Payments will automatically get debited when they become due.
If you did, the good news is you're not alone, and the government is offering affected businesses a way back. Near the end of March this year, HMRC offered VAT-registered companies the chance to defer VAT payments until March 2021. Despite so many businesses taking advantage of that lifeline, many others didn't cancel their direct debit arrangements in time.
HMRC doesn't have a mechanism for cancelling its collection process, so many payments were taken from businesses that wished to join the deferral scheme. If you're affected, you can claim a refund in one of two ways, and then defer the payment as you initially planned while taking advantage of the new measures.
Claim a VAT refund directly from HMRC. You can use the Coronavirus helpline to ask for a refund if you failed to cancel your direct debit in time. Make sure your bank details are up to date with HMRC before you apply and be advised that the process could take up to three weeks.
File a Direct Debit indemnity claim with your bank. If your cash flow situation is less than ideal, this method will probably be quicker, but it's wise to contact your bank first and discuss their specific policy requirements. Indemnity claims are designed for Direct Debit payers that want to claim a refund under the Direct Debit Guarantee. When a Direct Debit has been taken in error, the bank is required to deal with the situation immediately.
While there's no silver bullet for the damage COVID-19 has done to the UK economy – and some businesses won't make it through – the VAT deferral scheme's extension is a welcome development.
The key to maximising your survival chances during the pandemic is planning. Used alongside the right forecasting and cash flow management, the VAT deferral scheme can give businesses a chance to ride the storm that the virus created and get to the other side in decent shape.
The extension isn't a measure designed to allow companies the chance to defer additional VAT, but it is one that can buy you some time – and business owners who use that time wisely will reap the rewards.
Here at Accounts & Legal, we help businesses make the most of their cash flow with forecasting. We can also assist you with VAT and ensure you're not paying too much. If you'd like to learn more about how we're helping businesses during the COVID-19 pandemic, get in touch with our friendly team today on 0207 043 4000 or firstname.lastname@example.org.
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