On 20 March 2020, the Chancellor, Rishi Sunak, introduced several measures to support businesses. This note discusses the recent VAT announcement and suggests a few VAT working capital opportunities which businesses may wish to consider.
VAT announcement of 20 March 2020
VAT payments due from businesses between 20 March 2020 and the end of June 2020 will be deferred. No VAT registered business will have to make a VAT payment normally due with their VAT return to HMRC in this period. Payment of VAT will be deferred to the end of the tax year.
HMRC issued further clarification on 26 March 2020 - https://www.gov.uk/guidance/deferral-of-vat-payments-due-to-coronavirus-covid-19
What does this mean in practice?
The deferral for VAT payments applies from 20 March 2020 until 30 June 2020. All VAT registered traders are eligible. This will generally mean the deferral of one quarter’s VAT: the payment due on 7 April, 7 May or 7 June 2020 or the monthly payments due on each of these dates.
HMRC will not charge interest or penalties on any amount deferred as a result of the Chancellor’s announcement.
Businesses have until 31 March 2021 to pay any liabilities that accumulate during the deferral period. VAT refunds and reclaims will be paid by the government as normal.
Businesses will also need to remember to reinstate their direct debit mandate once the deferral is over and to decide to pay the accumulated VAT by the end of the 2020/21 tax year.
This is an automatic offer and no application is required. Businesses will not need to make a VAT payment during this period.
HMRC has confirmed that businesses will need to cancel their direct debits. Businesses that have a direct debit mandate in place to pay their VAT and wish to defer payment will need to contact their bank to cancel that mandate. This needs to be done before the direct debit is due to be collected.
Businesses should continue to file their VAT returns by the due date.
VAT working capital management
The following VAT working capital procedures should be considered.
Time to Pay “TTP” agreements
HM Treasury has announced a stepping up of resource and a specific COVID-19 helpline that businesses can call. TTP allows a business to defer current (as opposed to prospective) tax debts (principally corporation / income tax, payroll taxes and VAT – but theoretically any other tax or duty) by paying in instalments over a 3-12 months period.
As part of the process, directors are expected to provide written confirmation that each instalment will be made.
HMRC have made it clear that they see themselves in this instance as lender of last resort (and not of first resort). Therefore, the taxpayer must demonstrate that all other sources of finance have been pursued and exhausted. It is, however, critical to ensure supporting facts (and documentation) are available to evidence cashflow concerns.
Businesses with a Customer Compliance Manager should discuss this with them in the first instance. All others are encouraged to contact HMRC’s helpline on 0800 0159 559. The process can take less than an hour in a simple situation where the amount to be deferred is less than £750K. Agreement for deferral of larger sums will take longer.
Managing VAT cash flow effectively
The starting point for managing VAT cash flow effectively is to have a good understanding of the VAT flows within the business. These are as follows:-
VAT paid on sales;
VAT paid on purchases; VAT paid on imports; acquisitions tax paid on intra-EU purchases of goods and VAT accounted for on services provided by overseas suppliers under the reverse-charge mechanism.
Information needs to be split by country and, ideally, by legal entity.
Once this position has been identified, VAT processes can be targeted to determine whether the business has adopted an optimised VAT cash flow position.
Change to monthly VAT returns
VAT return periods can be changed or moved from quarterly to monthly cycles to speed up VAT repayments or delay VAT payments.
Payment on account reduction
All VAT-registered businesses with a VAT liability of £2.3 million or more in a period of 12 months or less, are required to make interim payments at the end of the second and third months of each VAT quarter in advance of their quarterly VAT returns. These are payments on account of the quarterly VAT liability. A balancing payment for the quarter, that is the quarterly liability less the payments on account made, is then made with the VAT return.
A trader may suffer a reduction in the volume of his business and thus a reduction in the amount of VAT payable. In this scenario, problems may arise if the monthly payments are calculated by reference to a higher base than is currently appropriate. In an extreme case, the trader may find that the payments on account made in months one and two exceed his quarterly liability and that he is entitled to a repayment on the submission of the return. Thus, the amount of the monthly payments should be revised where there is a material reduction in the VAT payable by the trader. Where the total VAT payable for a period of one year ending after the end of the reference period is 80% or less of the total VAT payable for the reference period, the payments on account may be determined by reference to the lower amount, providing written approval from HMRC is obtained.
Businesses may wish to consider making a payment on account reduction. Further guidance is set out here - Payment on account - HMRC guidance
Planning for payments on account
Large payment traders, who must make monthly payments on account, may wish to consider the following planning points:
starting any new business activities in a non-VAT-grouped company so that the related VAT liability is payable quarterly;
transferring as a going concern one or more existing business activities to a non-VAT-grouped company so that the related VAT liability is only payable quarterly;
de-grouping any company whose VAT liability is expected to fall below 80% of the liability for the previous year. HMRC may accept that such a company can pay reduced monthly payments on account;
electing to pay the actual VAT liability for a month, rather than the pre-set payment on account; and
avoiding grouping any more companies.
VAT incurred on purchase invoices that are received at the end of a VAT quarter can often be recovered (from HMRC) before the VAT shown on the invoice needs to be paid to your supplier.
Where invoice processing results in VAT being recovered in a later VAT period, accrual can be agreed to accelerate the recovery of VAT. This can apply to VAT incurred on most expenses including rent, imports and late supplier invoices.
Under normal VAT accounting rules, input tax can generally be recovered when the business is in possession of a valid tax invoice from the supplier. Many businesses recover input tax later than they are entitled to. This is usually due to the business having approval controls in place that ensure the invoice does not enter the accounts payable system until the invoice has been signed off.
Digital data tools will shortly become available to help businesses. The Digital initiatives include:-
Adjusting the accounts payable process to ensure earlier VAT recovery by way of a manual accrual; or
Seeking HMRC approval to uplift the input tax figure on the VAT return by a fixed percentage each period.
Identifying invoices with VAT that have been entered into the accounts payable system gross with no VAT being claimed – this may be due to uncertainty on the part of the accounts payable staff as to whether they are in possession of a valid tax invoice to support input tax recovery.
The added benefit of an exercise of this nature in the current climate is that it provides the business with a one-off injection of cash the first time it is done.
Self-billing arrangements could also be introduced to accelerate the recovery of VAT on regular costs.
Invoice timing – sales outputs
The timing of sales invoices. While sales invoices must be issued at specific times, cash flow can be improved by raising sales invoices at the beginning of a VAT return period.
Issuing a proforma invoice or a request for payment for services instead of a sales invoice should not create a VAT tax point. As a consequence, no VAT will be due to HMRC until after a payment is received from a customer (at which point an invoice should be issued).
Bad Debt Relief
The VAT declared on sales invoices can be claimed back from HMRC where the invoices remain unpaid after six months.
However, the opposite is also true, VAT recovered on unpaid purchase invoices should be repaid to HMRC after six months. This is a real concern which could result in unexpected VAT liabilities.
Several businesses routinely under-recover the VAT they incur on staff expenses. HMRC has discretion to allow retrospective VAT reclaims, for up to four years.
Import VAT and Duty
There are a few different options which may provide relief from paying customs duties, either temporarily or permanently depending on circumstances. Some of the most common are:
Duty deferment - registered importers can pay their duty on a monthly basis rather than at the point of import through a Deferment Approval Number (DAN.)
Customs warehousing - goods can be held in duty suspension in the EC until they are shipped onward to a customer.
Inward processing relief - goods can be brought into the EC for processing and re-exported without charge.
Outward processing relief - goods of EC origin can be exported from the EC to be processed and returned without charge.
Recover overseas VAT
Globally nearly 170 countries have a VAT system. Some countries have reciprocal arrangements with the EU and UK and in certain circumstances VAT incurred on overseas travel, subsistence and other costs can be recovered.
This is an area that can produce bottom line savings or cashflows can be improved by filing claims quarterly rather than annually.
VAT planning for the smaller business
A number of VAT accounting schemes can be used by smaller businesses to pay less VAT or pay it later.
Smaller businesses can choose to adopt the flat rate scheme, and this can result in a VAT benefit. The scheme allows a business to charge standard rate VAT on its sales. However it only pays an element of this VAT to HMRC. This can result in a VAT saving.
Businesses with a turnover below £1.35m can use the cash accounting scheme which results in VAT on sales being declared and paid to HMRC after customers have paid.