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VAT bill deferral – do your sums add up?

VAT bill deferral – do your sums add up?

Government support packages have been a vital lifeline to ease the pressure on SMEs' finances during the coronavirus pandemic.

However, the decision to allow VAT payments to be deferred until 2022 will only offer temporary respite from liabilities which ultimately will have to be repaid in full. SMEs who have opted into the Government's Time to Pay arrangement can split their VAT bill into smaller, interest free payments over the course of 11 months. This means that VAT liabilities due between 20 March and 30 June do not need to be paid in full until the end of March 2022.

CBILS deadline looms

The Coronavirus Business Interruption Loan Scheme (CBILS) allows businesses affected by COVID-19 to claim loans of up to £5 million interest-free for 12 months. But the clock is now ticking for SMEs to apply for finance as the CBILS scheme will be withdrawn from 1 April 2021.

Research* published earlier this year by ACCA highlighted how delayed and rejected finance applications through the CBILS scheme could restrict SMEs' ability to pay deferred VAT and tax bills. According to the survey, almost two-thirds of businesses were relying on a CBILS loan to cover their liabilities.

Those businesses who have received CBILS loans also need to be mindful that after the 12-months interest-free period expires their facilities start to become repayable with interest rates of up to 15%. It's therefore essential that business owners calculate their loan repayment costs ahead of the 12-month grace period from paying interest.
Should you put off paying for your VAT bill?

Just because you can put off paying your VAT bill doesn't mean you should. Whilst SMEs have been granted an extension of time this does not equate to a cancellation of the debt. Furthermore, many SMEs who choose to delay could end up being burdened with a sizable bill when their March 2022 VAT liability is due as normal.

To avoid increased costs and worry in the future, it might make sense to pay your VAT now.

Specialist commercial finance providers offer flexible funding solutions to enable businesses to spread the cost of their VAT bills over a 3-12 month period and retain greater control over their finances. This could help to ease any cash flow concerns and assist SMEs to smoothly manage future peaks and troughs.

Cash flow - do your sums add up?

SMEs will still have to carefully manage their cash flow against any reductions in sales, whilst remaining liable for fixed recurring charges associated with rent, insurance, employee pay and product and service delivery costs.

When contemplating deferring VAT, business owners should carefully consider the following questions:

  • Have your business revenues returned to some form of normality in the intervening months since you deferred your VAT?
  • What impact has the latest national lockdown had on your projected revenues and cash flow?
  • Would it be better to pay your VAT liability now to avoid a double payment in the future?

In a world that has become increasingly unpredictable, gaining predictability and understanding over your monthly expenditure will enable you to navigate current and future challenges with a clear perspective. Constantly reviewing your business's cash flow for the first quarter of 2021 will help you decide the best route for settling your VAT bill.

Information sources:
*ACCA - Survey finds two thirds of SMEs won't be able to pay their deferred tax liabilities in six months' time - May 2020

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