Contractors could face significant penalties if they haven’t repaid deferred VAT

In line with a series of amends to VAT payments made by the government in response to the COVID-19 pandemic, the VAT deferral payment scheme was introduced to support businesses during the pandemic, helping them preserve cash during an undoubtedly challenging time for many small business owners.

Here, Joanne Harris, Head of Technical Compliance and Payroll at SJD Accountancy explains what contractors should do if they haven’t repaid any deferred VAT liabilities.

What is the VAT deferral scheme?

According to the government scheme, VAT-registered businesses would be able to defer any VAT liabilities due to be paid between 20th March and 30th June 2020 to help them conserve cash flow. The deferral scheme was opened for registration on 23rd February and closed on 21st June 2021.

They later announced that businesses would be allowed to pay deferred VAT in a number of equal instalments, free of interest.

In total, nearly half a million businesses deferred more than £33.5bn of VAT. The take up of the scheme underlines the impact this support had on freelancers and contractors– as well as larger businesses looking to preserve cash.

To help these businesses pay the money back this year, the “new payment scheme” was introduced to allow beneficiaries of the VAT deferral scheme to make smaller, monthly payments. This offered businesses the option of spreading the repayment of their deferred VAT over several months, interest-free.

The repayment schedule is dictated by the month that the business joined the scheme, with those who registered from 19th March receiving up to 11 repayment instalments. This reduces accordingly, with a maximum of eight repayment windows granted to those who registered by 21st June.

What happens now that the scheme has closed?

Individual companies were responsible for registering themselves for the scheme, and the window for registration was promptly closed on 21st June. This deadline was subsequently extended to 30th June to allow extra time for companies to repay HMRC.

As both registration deadlines have now closed,  any business that has missed both deadlines and is still yet to repay the money in full, may face a 5% surcharge on the amount owed to HMRC from that period.

After a turbulent period for many businesses, this kind of penalty would likely be a most unwelcome addition – especially for those who are just now starting to get their business on track.

IT contractors who may have benefited from the VAT deferral scheme should understand that HMRC will continue to apply these surcharges if the money remains unpaid. This will likely involve further quarterly surcharges, with the possibility of these increasing to charges of 10 or even 15%.

What should IT contractors in this position do?

Our advice to any IT contractor who may be facing these surcharges is that they should aim to repay this money as soon as possible to avoid further charges.

Where this is not possible, we always advise starting an open and honest dialogue with HMRC as soon as possible. This will allow you to explain your personal circumstances and agree on a series of next steps that work for your business.

Despite the deadlines for repayments having already passed, HMRC recognises the financial difficulties that have fallen on many companies due to the events of the past eighteen months and are therefore usually willing to help where possible.

The worst response to a surcharge – or any potential tax bill – is to ignore the problem entirely. Addressing the issue head-on is always the best approach and will hopefully enable you to come to an amicable agreement on the next steps.

Further information on the VAT deferral scheme and repayment options can be found here.