The VAT deferral scheme was a temporary scheme set up during the Covid-19 pandemic which allowed businesses to defer their VAT payments by up to a year if their trade had been impacted by the pandemic. This helped to ease the burden on businesses who had noticed a drop in income as a result of lockdowns and restrictions.
In this article, we’ll explain exactly how the VAT deferral scheme worked and who could apply to be part of it. We’ll also explore VAT in more detail, giving you a deeper understanding of the UK’s VAT system.
How Did The VAT Deferral Scheme Work?
The VAT deferral scheme was created to ease the burden on businesses that were financially impacted as a result of the Covid-19 pandemic. The scheme enabled businesses to defer their VAT payments by up to a year, giving them extra time to pay.
Businesses that had VAT payments due between 20th March 2020 and 30th June 2020 were eligible to apply, and they didn’t need to provide proof of income to be a part of the scheme.
Once a business joined the VAT deferral scheme, they could choose to:
Pay their VAT bill in full by 31st March 2021
Become part of the online VAT deferral new payment scheme to spread their deferred VAT payments over interest-free instalments
Contact HMRC in order to make an arrangement to pay their VAT by 30th June 2021
If the business failed to either pay its VAT bill or make an arrangement to pay by the 30th June 2021, they were charged a 5% penalty fee.
What Is VAT And How Is It Paid?
Value Added Tax, or VAT, is a consumption tax that is added to eligible products and services in the UK. The vast majority of all goods and services purchased within the UK will be subject to VAT, although there are a few exceptions to this.
VAT is paid on raw materials right through to the final purchase by a consumer. VAT registered businesses can claim back the VAT that they pay, so ultimately it’s only the end customer that ends up paying the VAT charge.
Every business that has a turnover above the VAT threshold, which is currently set at £85,000 a year, must register for VAT. Once a business becomes VAT registered, it must start adding VAT onto products and services that are subject to VAT, collecting this tax from the customer and then passing they money on to HMRC.
Who Pays VAT – The Buyer Or Seller?
The charge for VAT is paid by the buyer. VAT registered businesses must include VAT in the sale price of their products and services, with the buyer paying the charge. This money is then passed to HMRC through VAT payments from the business.
VAT registered businesses are able to claim back the VAT they pay on business purchases. To be able to do this, you’ll need to keep clear records of business transactions, including VAT receipts for each purchase. In fact, for businesses which have newly registered for VAT, you are able to backdate VAT claims by up to four years prior to your registration date, providing you have kept accurate records and are still using the items purchased.
Can You Defer VAT Payments?
During the Covid-19 pandemic, businesses were able to defer their VAT payments by up to 12 months. This helped to reduce the financial impact of the pandemic on businesses.
Unfortunately, this scheme ended in 2020 and has not been replaced by a new scheme. So, there is currently no option to defer your VAT payments.
If you find that you are struggling to pay your VAT bill, it’s always best to contact HMRC as soon as possible to discuss your circumstances. In many cases, they will work with you to come to an arrangement for payment, helping to avoid any financial penalties being added to your bill.
Do You Pay VAT On The First 85000?
For businesses with a turnover of less than £85,000 per year, there is no obligation to register for VAT. This means that you will not have to charge VAT to your customers, complete a VAT return or pass money onto HMRC for VAT.
Once you reach that all-important VAT threshold which is currently set at £85,000, you will need to register for VAT. It’s important to note that the VAT threshold refers to your turnover rather than your profit. So, even if your profit is only £1,000, you’ll need to register for VAT as soon as your annual turnover reaches £85,000.
There is an option to register for VAT voluntarily, even if your turnover is below the £85,000 threshold. Companies may choose to register for VAT voluntarily to improve their image, or if they find that the savings from being able to reclaim VAT from purchases outweigh the costs involved with VAT registration.
Benefits Of Being VAT Registered
Whilst the idea of charging VAT to your customers and completing extra paperwork may not sound appealing, you may be interested to learn that there are some benefits that come with being a VAT registered business.
Let’s take a look at some of the key benefits of registering for VAT.
1. You’ll Receive A VAT Registration Number
When you register for VAT, you will be given a VAT registration number. This may not sound particularly exciting, but displaying a VAT registration number on your website and your business stationary can help to improve the credibility of your business, as well as making you seem more trustworthy and professional to potential clients.
2. Your Business Image May Improve
In business, image is everything. Small businesses often find it difficult to build a customer base, especially in the competitive B2B world where many larger businesses only want to work with other established businesses.
Most business owners are aware of the threshold for VAT registration, so being VAT registered will give the impression that you are an established and successful business. This could help you to win bigger contracts and increase your earning potential.
3. You’ll Be Able To Claim Refunds On VAT
When you become VAT registered, you will need to start charging VAT to your customers. However, you also get the perk of being able to claim back VAT that you pay on purchases for your business. So, if you pay VAT on your accountant’s fees or any raw materials that you buy, you’ll be able to claim back the VAT on these purchases from HMRC. This can help to save your business some valuable cash.
4. You Can Claim Back VAT On Historic Purchases
Once you are VAT registered, you will be able to reclaim VAT you have paid on purchases up to six months in the past. For items you are still using, such as office equipment or software, you may be able to reclaim VAT from up to four years, providing you have VAT receipts as evidence. So, you may find that you are able to recoup a significant amount of money for your business by registering for VAT.
Who Needs To Complete A VAT Return?
Every VAT registered business will need to submit VAT returns to HMRC every three months. This is the case even if you don’t have any VAT to pay or reclaim.
The deadline for submitting your quarterly VAT return and paying your VAT bill is usually one month and seven days after the end of your accounting period. You can check the date on which your next VAT return is due through your online account on the HMRC website.
If your business is not VAT registered, you are not required to file a quarterly VAT return. However, if your turnover (that’s the total money coming into your business, not your profit) is expected to exceed £85,000 in a rolling 12 month period, you will need to register for VAT and begin completing VAT returns.
How Does VAT Get Paid?
If your business is getting ready to submit its first VAT return, you might be wondering how you go about paying your VAT bill. After all, the penalties for paying your VAT bill late can be severe.
Once you have submitted your VAT return to HMRC, you will be asked to pay your VAT bill. This must be done electronically, either by Direct Debit or through your internet banking system. If you have any problems paying your VAT bill in this way, it is essential that you contact HMRC as soon as possible to discuss your options and avoid any penalties for late payment.
Do I Need To Pay VAT As A Small Business?
As a small business owner, the world of taxes can feel confusing. There are so many different things to think about, with VAT just one thing on a long list of things to remember. So, do you need to pay VAT as a small business?
The VAT registration threshold is currently set at £85,000. This relates to your business turnover. So, if you have more than £85,000 coming into your business each year, regardless of your profits, you will need to register for VAT. This is also the case if you expect your business turnover to reach £85,000 within the next month.
Once you have registered your business for VAT, you will need to start charging VAT to your customers on all products and services that are subject to VAT under UK law. You’ll then complete quarterly VAT returns to declare this to HMRC, before passing on the money that you have collected from your customers to HMRC.
You will also be able to reclaim any money that you have paid yourself for VAT on business purchases. For example, if your accountant is VAT registered, you will be able to claim back the VAT that you have paid from HMRC within your quarterly VAT return.
If your business does not turn over at least £85,000 each year, you will not need to register for VAT. However, some businesses choose to register for VAT voluntarily, as they find that the benefits of being VAT registered outweigh the cost to their customers and the extra paperwork that is involved with VAT registration.
Is VAT Paid Monthly Or Quarterly?
The majority of businesses are asked to submit VAT returns on a quarterly basis. After each VAT return is submitted, you will be asked to pay your VAT bill. So, most businesses will pay VAT to HMRC every three months.
However, if your annual business turnover is less than £1,350,000, you can choose to use annual accounting. With annual accounting, you are able to pay monthly instalments to HMRC based on the previous year’s VAT liability. You’ll be asked to pay nine monthly instalments of 10% of the previous year’s bill. You’ll then submit your annual VAT return, before being asked to pay the remainder of the balance.
Top Tips To Manage Your VAT
The world of VAT can feel overwhelming, especially if you are new to registering your business for VAT. We’ve put together some of our top tips to help you manage your VAT and ensure that you keep on top of your accounting.
1. Make Use Of Technology
Technology is your best friend when it comes to accounting. Fortunately, many accounting software packages give you the ability to keep track of your VAT, making it quick and easy to file your quarterly VAT returns. Not only can this help to make your life easier, but it will also reduce the likelihood of errors occurring.
2. Keep Your Evidence
If you want to reclaim VAT, you’ll need to keep evidence of your VAT receipts. This also goes for any VAT that you receive from customers on sales. If you’re selected for an investigation by HMRC, you’ll be glad you saved all of those receipts!
3. Don’t Forget To Reclaim
VAT registered businesses need to charge their customers VAT on any eligible purchases and then pay this money to HMRC. However, don’t forget that you can also reclaim money from HMRC for any VAT paid on purchases that the business has made.
4. Make Use Of Professionals
Whilst many business owners choose to complete their VAT returns themselves, it isn’t always an easy job. Accountants are the experts when it comes to VAT, so if you’re unsure, it’s worth investing in a good accountant who can ensure that your VAT returns are completed accurately and on time.
5. Don’t Bury Your Head In The Sand
It can be easy to forget about VAT if things start to get on top of you. If you find that you are falling behind with your VAT payments, it’s best to speak to HMRC as soon as possible. They will work with you to arrange a repayment plan that you can afford, helping you to avoid any potential financial penalties for late filing.
The VAT deferral scheme was a temporary scheme designed to support businesses through the financial hardship of the Covid-19 pandemic. If you are struggling to pay your VAT bill, the best thing to do is to contact HMRC as soon as possible and talk through your options. In most cases, they will work with you to put together a repayment plan to help you to avoid any financial penalties for late payment.