In this article, we highlight various VAT reliefs that can provide cash flow savings to businesses, including instalment payments for deferred VAT liability and accelerated approval for partial exemption methods.
Deferred VAT liability – instalment payment
In 2020, HM Revenue & Customs (HMRC) announced a number of VAT support measures to help UK businesses adversely affected by the Coronavirus pandemic.
This included allowing UK businesses to defer VAT payments due between 20 March and 30 June 2020.
The liability had to be paid in full by 31 March 2021, however in February 2021, HMRC said it would allow payment by instalment. To benefit from the instalment scheme, businesses must have opted in before 21 June 2021.
The new measure gives businesses the chance to pay their deferred VAT liability over a maximum of 11 instalments. The first instalment payment is made as part of the opt-in process and thereafter equal monthly payments will need to be made (typically by direct debit, unless other specific payment arrangements are made with HMRC). By 21 June 2021 (the deadline for opting-in), the outstanding balance will need to be paid over eight instalments.
For businesses that face ongoing cash flow issues due to the pandemic and lockdown, and are struggling to pay their VAT liabilities, the opportunity is still there to discuss with HMRC additional time to pay arrangements. We would encourage businesses to speak with HMRC as soon as it is identified that settling a VAT liability by the due date may be an issue.
Partially exempt businesses can vary their recovery methods
HMRC has introduced an accelerated process for VAT registered businesses to request temporary alterations to their partial exemption methods (including combined special methods for partial exemption and non-business apportionments) to reflect changes to their business practices because of the Coronavirus pandemic.
The accelerated process applies where business activity has changed as a result of Coronavirus, but is expected to recover in due course. Where this is the case, HMRC is likely to accept proposals that use representative income streams from the previous tax year or projected income for a delayed activity to get a fair and reasonable recovery rate.
The onus will be on the taxpayer to demonstrate in its submission to HMRC that the requested changes seek to address the impact that lockdown has had. An HMRC Brief outlines some of the detail around submitting a variation request by email and the evidence that is needed to support the position.
Businesses that have already agreed a special partial exemption method should review their position now, to take advantage of this accelerated review process. It should be noted that HMRC considers the pandemic to be an exceptional circumstance, meaning a variation to a partial exemption method may have retrospective effect, with HMRC’s approval.
Businesses that have not agreed a special method (ie they use the standard method) may not see the benefit of this opportunity and HMRC is encouraging them to rely on the standard method override to make input tax recovery adjustments, which is only available if the under-recovery using the standard method is significant. Such businesses may instead decide to apply for a special method, however that may not be reviewed and approved by HMRC under the accelerated process and may take some time to agree. The important point to note is that an application for a special method needs to be made within the tax year to which it relates. Therefore, the application for the period commencing on 1 June 2020 needs to be submitted before the end of May 2021.
Other cash flow measures
We have highlighted some other items that may be of interest to businesses looking to find ways to improve cash flow position, as follows:
VAT bad debt relief
Businesses that have not been paid by their customers for more than six months after the due date of payment, can claim relief from the VAT paid to HMRC on the bad debts.
The claim is made through reducing the output tax amount in the current VAT return.
On the other hand, if a business has not paid its suppliers for over six months, a corresponding input tax adjustment to repay input tax claimed must be made.
Where the Covid-19 deferral measures have been utilised, careful analysis of the availability of VAT bad debt relief is required.
Demands for payment in place of VAT invoices
Businesses should review whether their invoicing process is VAT efficient, especially in relation to a property letting business, where demands for payments are a common mechanism for landlords to eliminate VAT cash flow costs.
VAT is payable on recurring rental income by reference to the earlier of payment date or issuing a VAT invoice. It is, therefore, possible for rent demands/requests for payment to be issued without creating a tax point. This means that if landlords do not receive payment as normal, then the payment of VAT can be deferred until tenants are able to pay. A VAT invoice should be issued by the landlord once payment has been received.
Businesses that have a taxable turnover of £1.35 million or less can switch to cash accounting at the start of a VAT accounting period. Under this scheme, VAT on sales is accounted for when payment is received and this is beneficial in a context where customers are delaying payment of invoices. However, VAT is recoverable only when purchase invoices have been paid, and so this may impact VAT cash flow savings in cases of expenditure with longer payment terms.
Businesses should review whether one or more of the VAT measures we have outlined in this article can be utilised to improve their cash flow position, including some basic housekeeping and process improvements. Any strategies employed should be evaluated to avoid any compliance-related risks moving forward.