How will extending the VAT cut protect jobs?

With Steve McCrindle, VAT Partner at Haines Watts

In his economic update, Chancellor Rishi Sunak announced that businesses which have deferred their VAT because of the COVID-19 pandemic no longer have to pay a lump sum at the end of March.

This is a vital extension to the original lifeline offered to businesses at the start of the pandemic and one which is aimed at helping them recover strongly as well as supporting the livelihoods of millions of people.

At the start of the pandemic, all UK VAT registered businesses were eligible to access the original VAT deferral scheme, which resulted in half a million businesses deferring more than £30bn of VAT.

At this point, a lot of owner-managed businesses were living hand to mouth. They took the deferment to create breathing space, but still feared they wouldn’t have time to accrue the surplus cash to pay back the VAT in 2021.

While there is still a concern for the future of some of those businesses, the new VAT Deferral Payment Scheme is a massive relief for many. It now presents a new choice and instead of paying the previously deferred VAT in one lump sum by 31 March 2021, they will now not face this large bill during their own economic recovery.

Manageable, interest-free instalments

As an alternative, they will now have the option of making 11 smaller interest-free payments, each around nine per cent of the total deferred VAT they owe, starting at the end of March 2021 with an initial upfront payment (again, of around nine per cent). This will continue until 31 March 2022.

This measure eases the burden for businesses by helping them with their cash flow as they adapt to the new economic environment.

For example, if you consider that the average deferred VAT per business was around £60,000, it means a business is now just going to have to make an initial payment of £5,400 at the end of March 2021 instead.

Although no additional VAT will be deferred by this measure, businesses that do opt to make the instalments get an extension of time – that’s up to one year to pay the previously deferred VAT.

Lump sum will keep businesses buoyant

Business owners that have the ‘lump sum’ banked already can also use the cash to keep their businesses buoyant, and use it to spur quicker momentum and growth. Those that don’t have the ‘lump sum’ banked and were facing a monumental debt to pay at 31 March 2021, now effectively have time to pay in an easier, more managed, way.

Will affected businesses be ready for Brexit?

Some of the businesses that have deferred payment have also been hit by the Brexit changes. As we know, currently only 24% of UK businesses are fully prepared for Brexit. The rest need to find the cash to get themselves Brexit ready, whilst still having the deferred payment to manage and pay.

We’re working with our clients to make sure they are Brexit ready and that VAT payments can be paid. The first quarter of 2021 is going to be tricky for many businesses when it comes to cash flow and while the VAT deferment scheme is a great lifeline, the situation in which some business owners find themselves is still precarious. At least there is now something concrete on how businesses may manage their VAT bills.