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Cash flow conundrum – why deferring your tax liability could be a risky move

Cash flow conundrum – why deferring your tax liability could be a risky move


Cash flow is a hot topic in the wake of the coronavirus pandemic. The finances of SMEs and self-employed professionals have been placed under considerable strain due to challenging trading conditions, accumulating operating losses and reduced earnings.

The impact has prompted some to take advantage of the opportunity to defer paying VAT and self-assessment tax bills under the government's Covid-crisis support scheme.

Whilst well intended, it remains to be seen whether these initiatives go far enough to alleviate the pressure on UK businesses who are facing the prospect of being saddled with unsustainable debt heading into 2021.

Government support at a glance

  • Businesses who chose to defer VAT payments which relate to the quarters ending 29 February 2020, 31 March 2020 or 30 April 2020 which was required to be paid by 31 March 2021, are now able to pay the deferred VAT in 11 interest-free instalments up to the end of March 2022.

    Those wishing to take advantage of this option will need to opt into the scheme, failure to do so will mean that the VAT owed will need to be paid in full by 31 March 2021.
  • Taxpayers with up to £30,000 of self-assessment liabilities, whether deferred from July 2020 or otherwise due on 31 January 2021, can now arrange to make payments in 12 monthly instalments under HMRC's Time to Pay scheme. Full and final payment can now be deferred until January 2022.

    Taxpayers opting into Time to Pay will be required to pay interest on tax owed from February 2021.
  • The deadline for Bounce Back (BBL) and Coronavirus Business Interruption Loans (CBILS) applications has been extended until 31 March 2021.

    If they wish, CBILS lenders can now offer borrowers more time to make their loan repayments, from six years to ten years, which will result in monthly payments being reduced by nearly half.

Time to Pay, or is it time you paid now?

Deferring your tax bill and paying through the Time to Pay scheme may seem like an obvious choice, however choosing to delay could have serious financial implications in the future.

Many self-employed professionals may have to pay more in tax than they have actually earned in the past year because the payment on account system is based on the previous year's earnings.

The reality of facing larger than anticipated tax bills, combined with a significant drop in income, is likely to have alarm bells ringing for those who have not kept a right rein on their finances.

The impact could become more significant in an uncertain business climate, particularly if more lockdowns are imposed in the event of rising outbreaks of the pandemic.

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.

The government's decision to extend the deadline for payment until 2022 will only offer temporary respite. SMEs will still have to carefully manage their cash flow against a potential reduction in sales, whilst remaining liable for fixed recurring charges associated with rent, insurance, employee pay and product and service delivery costs.

Despite the BBL and CBILS offering greater flexibility, it's worth bearing in mind that these schemes have been an equal blessing and a curse as some lenders are focusing on these exclusively.

As a result, some have withdrawn other financial products from sale and others may struggle to cope with the influx of last-minute enquiries in January.

**According to Growth Business, CBILS lenders will charge in interest between 3% and 14.99% (the maximum amount permitted) once the one-year interest-free period ends.

Up until the beginning of December 2020, 77,909 loans worth £18.46bn have been provided through the CBILS with the current rejection rate for all CBILS loans applications standing at 55%.

Deferral isn't the only option

To avoid increased costs and worry in the future, you can still choose to pay your tax bills now as you normally would. In fact, HMRC are encouraging businesses and self-employed workers to behave as 'good citizens' and pay the tax they owe on time thereby helping the Government. In doing so, you could be helping yourself in the long-term.

If you do choose to make the payment, you may wish to spread the cost over the remaining months of the year in order to retain working capital in your business.

Alternative finance providers offer unsecured loan facilities which allow you to spread the cost of tax liabilities in a flexible way, over a term of six or 12 months (for self-assessment tax). Some are also currently offering an optional deferred repayment for the first month, further easing the burden on your finances.

Specialist lenders can also provide commercial 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 - better the devil you know

In a world that has become increasingly unpredictable, gaining better predictability and understanding over your monthly expenditure will enable you to navigate current and future challenges with a clear perspective.

While the weeks ahead remain uncertain, at least there is some comfort that there are a plethora of government schemes and alternative funding options available to those that need them.

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

**Growth Business - Top 20 CBILS lenders and what they charge in interest - December 2020

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