Deferral of payment: When can you ask for VAT deferrals?

In times of crisis, it can be helpful to look to local authorities and HMRC to opt for deferral of payment to avoid negative consequences caused by late payments. In March 2020, HMRC allowed all businesses to defer their VAT payments if they would’ve been due between 20th of March and 30th of June 2020. But what is deferral of payment, and what is the difference to a deferred payment agreement?

What is a deferred payment?

Definition: deferral

As per the definition, a deferral is a form of delayed payment which debtors and creditors agree on to delay the due date of a payment claim beyond the date originally agreed to or as stipulated by law.

Normally, payments to HMRC or National Insurance must be made regularly, or they could face late payment charges. To avoid late payment charges, it is sometimes possible to defer payments. An example of this is a business having to make VAT payments to HMRC, but being unable to due to unforeseen financial hardship. During the start of the early 2020 Coronavirus pandemic, HMRC agreed to defer VAT payments to help businesses stay afloat. In the UK, the terminology around deferrals usually applies in the context of your local authority. Repayment pauses to banks or your mortgage, for example, are known as payment holidays.

However, there is a similar term in UK terminology called a deferred payment agreement. Your local government must first assess whether you are eligible to enter a deferred payment agreement, which is something you can apply for if you have to enter a care home – it is not for businesses nor the self employed.

Note

A deferred payment agreement is usually the term used for deferring payments an individual must make to pension schemes, national insurance, and taxes if they must move into a care home. This is often referred to as a DPA, and was set up in 2015 to ensure people were not financially jeopardized if they had to be moved into a care home. It is not the same as a VAT deferral, which businesses are eligible for, or a self-assessment payment deferral for the self-employed. These forms of deferral became increasingly important in light of the 2020 Coronavirus pandemic. It is also not the same as a payment holiday.

In March 2020, HMRC announced that it would allow businesses to defer their VAT payments for businesses impacted by the outbreak of COVID-19. To defer your VAT payments, all you have to do is ensure you’re aware of the guidelines from HMRC, and still submit your VAT return as normal – just without having to pay it yet.

Prerequisites for a deferral

As mentioned above, a DPA is usually an agreement you may be eligible for if you need to pay care home fees and cannot generate enough money because you cannot sell your house, for example. However, a VAT deferral is possible for businesses (see below). In general, individuals can apply for a national insurance deferral. To defer NI payments you must have more than one job and pay Class 1 NI, if you earn more than £962 per week or more from one job, or earn £1,145 per week or more from 2 jobs or more.

Coronavirus pandemic: VAT deferral and Self Assessment Payment Deferral

The exceptional nature of the effects of the Coronavirus on the economy and daily lives of people world wide meant governments had to adjust their usual timelines. As such, the UK government have offered to allow businesses whose VAT returns would have been due between 20th of March 2020 and 30th of June 2020 to defer their VAT payment.

Who can choose to defer?

All individuals, small businesses and corporations who are taxpayers can defer their VAT payments.

HMRC has also confirmed that it will not charge interest on VAT payments which are deferred.

Note

Import VAT is an exception in this case! Import VAT is still due during the pandemic, and a VAT deferral is not possible here.

What is the deadline to apply?

The good news is that you can choose to defer your VAT payment by not paying it within the timeframe mentioned (until June 30th 2020, at time of writing). This saves you having to inform HMRC of your VAT deferral. You’ll just have to make up for that payment at a later date. Your deferred VAT payment must be made before or on the 31st of March 2021.

Note

A VAT deferral is not a cancellation of payment. If you choose not to pay VAT at this time, you’ll have to make the payment later on. Consider if making a bigger payment down the road will put more strain on your business than paying VAT as usual. HMRC are still taking VAT payments, the option to make a deferral of payment is exactly that – an option, rather than an obligation.

What about the self-employed and payments on account?

There are a few options for those who normally return self-assessment tax bills. Payments on account are normally due on the 31st of January and 31st of July each year. However, due to the consequences of COVID-19, the government have extended the deadline for the second payment on account to January 2021. This would mean you have 2 payments due by that deadline, if you choose to defer.

Note

It may be, of course, that you need a bit of a leg-up during this challenging time. If you are in need of financial support, there is a grant scheme developed by the government to support the self employed who have lost income due to the Coronavirus pandemic. The grant is taxable and subject to income tax as well as national insurance payments, but you don’t need to repay it. The grant will cover up to 80% of your trading profits, meaning you could get up to £2,500 a month depending on your income. Once this scheme goes live, you’ll only be able to apply online.

Deferrals: Take with a pinch of salt?

It is good news that the UK has allowed deferral of payment during this time. Businesses may feel relieved that they will be able to defer their VAT payments, and the self employed will perhaps benefit from deferring their payments on account. However, this should not be a decision you make lightly. As mentioned above, these deferments of payment are not payment cancellations. It is unclear how long the effects of the continued spread of COVID-19 will last, or indeed how much the situation could still change. If you can afford to make your payments now, it is perhaps a good idea to do so as usual, because you may not be in the same situation further down the road.

Please note the legal disclaimer relating to this article.

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