In this month’s VAT Update we focus on the Coronavirus support measures introduced by the government; some best practice tips and areas for consideration to help manage cash flow during these challenging times; together with some aspects to be mindful of when considering diversification in the standard business model in order to generate additional income during the current lockdown.
Coronavirus VAT support measures update
Since our last issue of VAT Update, there have been several new measures announced and clarifications in terms of some of the existing ones, as follows:
- Deferred VAT payments due in the period from 20 March 2020 to 30 June 2020 need to be paid to HM Revenue & Customs (HMRC) by 31 March 2021.
- The VAT payment deferment is available to all UK VAT registered businesses, including businesses registered for UK VAT but established outside the UK.
- The digital links requirement under Making Tax Digital will now come into effect from 1 April 2021.
- Payments on account interim payments can be deferred if they fall due in the deferment period.
- Import VAT and Customs Duty relief is available on the importation of items such as personal protective equipment (PPE).
- Registered importers who pay cash or an equivalent and are facing severe financial difficulties as a direct result of Coronavirus can contact HMRC to request an extension to the payment deadline at the time the payment is due.
We have prepared some frequently asked questions and answers about deferring VAT payments. You can read more here.
Cash flow opportunities
We have highlighted below some items that may be of interest to businesses looking to find ways to improve cash flow during these difficult times.
Monthly VAT returns
If you regularly make VAT reclaims in your VAT returns, you may wish to consider switching to file monthly VAT returns. The request can be made through HMRC’s online portal by submitting Form VAT 484 and completing section 3 to request this.
If you are a UK established VAT registered business, but have been trading below £83,000 in the last 12 months, you may wish to consider VAT deregistration. Of course, there may be worthwhile reasons that your business is VAT registered, including that you may be recovering VAT on your costs.
Payments on account
Larger businesses within the Payments on Account (POA) regime may wish to consider:
- The deferral of monthly instalments due between 20 March 2020 to 30 June 2020.
- Agreeing with HMRC lower value monthly instalments, where there has been a loss of trade during lockdown.
- Reviewing turnover to see if they can be removed from the POA regime altogether.
- Consider moving to monthly VAT returns to come out of the POA regime.
Businesses can switch to cash accounting, at the start of a VAT accounting period, if their taxable turnover is £1.35 million or less. Under this scheme, VAT on sales is accounted for when payment is received, which is beneficial in a context where customers are delaying payment of invoices. Under the scheme, VAT is recoverable only when purchase invoices have been paid.
Bad debt relief (BDR)
Many businesses are unaware that if their customers are more than six months overdue in settling balances due, businesses can make automatic bad debt relief claims and reduce the output VAT due on their sales. The VAT is deducted in the VAT return period the bad debt relief conditions are met. Contrary to popular opinion, the debt does not need to be written off in the annual accounts and the customer does not need to be notified. However, a memorandum account (in the management accounts or VAT records) should be kept, to record bad debts along with the other information required under the BDR rules.
Timing of issuing sales invoices
Many businesses overlook the 14-day rule and the date the invoice is issued to the customer that can shift the VAT tax point on sales to the date the invoice is issued. Businesses that are recording sales near month end, may want to consider the date the invoice is sent to customers. This may create a VAT tax point date after the sale is recorded in the accounts of the businesses at, say, month end. This may allow the output tax to be accounted for in the next VAT return period. It should be noted the correct tax point should still be recorded on the invoice even if this is different to the date the invoice was raised.
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. What this means is 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.
Maximising and accelerating input tax recovery
Some basic housekeeping and process improvements can help to further maximise and accelerate input tax recovery, so helping with cash flow.
Input tax accruals
Cash flow benefits can also be realised through input tax accruals. VAT can be claimed in relation to purchase invoices approved for payment but not yet posted into the accounting at the end of a VAT reporting period. Input tax can be added to the VAT account on this basis without HMRC approval and some good housekeeping in this area can accelerate input tax recovery. Such accruals would need to be reversed in the following period when the purchase invoices are posted to the accounting, to avoid duplication.
VAT recovery on employee expenses
Businesses should review their processes for reclaiming VAT incurred through employee expenses, to ensure the maximum amount available is being recovered. Employees should be encouraged to promptly provide the supporting VAT receipts or invoices for the costs they are incurring on behalf of the business. Businesses should anticipate further recovery on items being provided to employees for home-working.
Year end reconciliations
We would always recommend reconciling the VAT input and output balance sheet accounts to the VAT returns that have been submitted. Sometimes VAT amounts are posted directly to the VAT liability account in error and can therefore be missed when preparing VAT returns. An annual reconciliation would iron out these amounts and, subject to the net amount to be claimed/paid to HMRC being below £10,000, can be adjusted on a current return.
Putting property assets to different uses
During the Coronavirus pandemic businesses are thinking of different way to use their property assets in order to secure alternative income streams, where an original income stream has dried up due to lockdown measures. Such change of use in property assets can lead to VAT complexities. Below are examples to illustrate the point.
Furnished Holiday Lets changed to short-term residential lets
The switch from supplying Furnished Holiday Lets (FHLs) to Assured Short-Term tenancies (AST), even for a temporary period, can have significant VAT consequences. The two main points to consider are:
- Whether or not VAT is chargeable on the rent, given the property is essentially an FHL property; and
- The VAT recovery position resulting from making an exempt supply. The risk of having an irrecoverable VAT cost increases if a property has not yet been used for FHL supply purposes, or if any improvement works are in the scope of the Capital Goods Scheme.
If rooms in student accommodation are made available to key-workers to live-in or utilise for example, there is a potential VAT adjustment to make in respect of a change of use within the first 10 years of the life of a halls of residence building. The initial construction of the property may have been zero-rated, with the recipient of the construction services issuing a certificate to confirm intended use of the property as solely for student accommodation purposes (the “relevant residential purpose”). If within 10 years of completion of the property, it is used for any other purpose, the owner will face the possibility of having to account for VAT on what is considered to be, a self-supply. This can also apply if a charity has constructed a building under the “relevant charitable purposes” relief.
Partial exemption considerations
The Coronavirus pandemic presents challenges for businesses and organisations that rely on trading income to be the primary driver behind partial exemption calculations in relation to the proportion of VAT which is recoverable on general overheads. The current “break in trade” being experienced will reduce the level of VAT recovery enjoyed by these organisations. Taxpayers affected by partial exemption should consider whether their existing method allows them a fair and reasonable apportionment of input tax and, if not, consider whether they should apply the Standard Method Override (SMO).
The SMO deals with circumstances where the standard method does not produce a fair and reasonable deduction of input tax. The override requires you to make an adjustment when the input tax deducted during the tax year using the standard method differs substantially from a deduction based on the use or intended use of the purchases received by you in making your taxable supplies. In this scenario “substantial” means a difference which exceeds £50,000, or 50% of the residual input tax, and at least £25,000.
This is an area of risk in terms of the input tax that has been recovered throughout the year and could be subject to an adjustment at the year end.
HMRC is allowing taxpayers to complete their partial exemption annual adjustments in the final VAT quarter of the partial exemption year. Taking advantage of this may provide a positive cash flow benefit if any repayable input tax is reported in a VAT accounting period that falls within the VAT deferment measure.
Given the SMO) is required in the same VAT reporting period as the annual adjustment, bringing the adjustments forward to the quarter ending 31 March will be beneficial if it is known an SMO adjustment is required, as the additional liability can be deferred until 31 March 2021.