As Benjamin Franklin once said, “In this world, nothing is certain except death and taxes”. This quote still holds true today, regardless of what financial situation you might find yourself in.

These days, the UK government and HM Revenue & Customs (HMRC) do tend to lend businesses and taxpayers a helping hand when it comes to paying VAT owed to them. They do this by allowing companies to defer VAT to a later date.

This doesn’t mean they no longer have to pay the VAT owed, but it will give businesses more time to acquire the funds necessary to make the payment. But what exactly is deferred VAT, and when does it apply?

This article will explore the answer to these questions and how to pay, and what to do if you can’t make your payments on time.

Deferred VAT is when businesses are able to postpone their VAT payments to a later date. Deferred VAT payments can give a company some time to accumulate cash until their VAT deferral period has ended. This is usually done in times of recession or a market crash so that businesses don’t experience a double whammy in terms of having to pay a hefty VAT payment to the government on top of experiencing financial hardship due to loss of business.

The most recent form of this was in 2020, which was brought about after the initial market slump during the 2020 pandemic.

Why was deferred VAT introduced?

The UK government introduced the VAT deferral scheme during the February 2020 market crash caused by the beginning of the COVID-19 outbreak in the world. To ease the cash flow pressures that many businesses were experiencing, the government allowed business owners to defer their VAT payments to a later date.

There was no particular procedure that businesses had to go through in order to engage in VAT payment deferral. All they had to do was cancel their VAT payment for that period. For instance, if a business had a direct debit for paying their VAT, they simply had to cancel their payment before the direct debit processing had begun. However, this doesn’t mean that businesses were exempt from filing their VAT returns. They still had to file their VAT returns by the expected deadlines, but they were simply allowed to delay the payment on them.

Between the dates of 20 March 2020 and 30 June 2020, businesses were given the option of deferring VAT payments until 31 March 2021, giving them plenty of time to acquire some cash. These businesses were required to pay the deferred VAT in full by 31 March 2021. Alternatively, they would have to make a payment arrangement with HMRC to pay by 30 June 2021 to avoid a 5% late penalty and interest charges. But at the turn of 2021, plenty of businesses had unpaid deferred VAT outstanding and would have been unable to pay by the 31 March deadline. This was when the UK government introduced the VAT Deferral New Payment Scheme, which allowed businesses to pay in instalments.

How did the VAT Deferral New Payment Scheme work?

The new VAT deferral scheme gave businesses the possibility to pay back their outstanding VAT in interset free smaller instalments, spreading the cost out over a longer time frame. Companies were able to select the number of monthly payment instalments they wanted to spread the costs over (up to a maximum of 11 instalments) by joining the new payment scheme by a specific date.

The first of these instalments to pay deferred VAT would be at the time of joining the deferral payment scheme, and then subsequent payments were to be made in equal instalments by Direct Debit or alternative methods thereafter:

  • 19 March 2021 - 11 instalments
  • 21 April 2021 - 10 instalments
  • 19 May 2021 - 9 instalments
  • 21 June 2021 - 8 instalments

The date of your latest VAT return also determined the date on which you joined the scheme:

  • 21 April 2021 - with the quarter ending in March, instead of submitting your return by 7 May, it must have been submitted by 21 April
  • 19 May 2021 - with the quarter ending in April, instead of submitting your return by 7 June, it must have been submitted by 19 May
  • 21 June 2021 - with the quarter ending in May, instead of submitting your return by 7 July, it must have been submitted by 21 June

Eligibility to join the VAT Deferral New Payment Scheme

Businesses who were on the VAT Payment on Account Scheme or the VAT Annual Accounting Scheme were invited to the scheme by March 2021, but other businesses would have had to join the scheme themselves. In order to join the scheme, it was a requirement for companies to have VAT returns that were up to date for the last four years. This was done so that during the deferral process, it was clear how much was already paid, how much was owed and to address any errors or issues with their VAT returns.

How to pay your VAT bill

Paying your VAT bill, whether deferred or not, is a simple process. Most businesses choose to pay via Direct Debit as it requires no additional effort on their behalf; the appropriate amount gets taken out of their account when needed. Especially with the government’s Making Tax Digital initiative, a Direct Debit is the recommended method of payment from now on.

Having said that, you also can pay via online banking or CHAPS. These two methods will ensure the payment arrives on the same day or the next working day. Alternatively, you can opt to pay via a bank transfer, standing order, or at your bank or building society. These methods can take up to three working days for the money to arrive.

Therefore it’s crucial that you don’t pick a payment method which will result in you missing a payment deadline and thus incur a late penalty charge or interest. To verify your payment deadlines, the government has a nifty payment deadline calculator you can use.

What is the penalty for VAT non-payment?

Typically, your penalty is charged at 5% of the unpaid VAT at the time of assessing your penalty. For instance, if you have an outstanding VAT payment of £1,000, you will be charged an extra £50. You may also be charged interest on your VAT payment. That’s why you must pay your VAT on time or as soon as possible.

During the VAT Deferral New Payment Scheme, if you did not pay or make an arrangement to pay by the 30 June 2021 deadline, the 5% penalty was charged. This penalty would have to be paid within 30 days of assessing the penalty.

What if I can’t pay my tax bill on time?

The worst thing you can opt to do in this situation is bury your head in the sand and avoid it. Instead, contact HMRC immediately if you have missed a payment deadline or if you know you won’t be able to pay in time. Typically, HMRC is quite flexible and will help you establish a payment arrangement that works for you. As long as you don’t leave it too late and are proactive, HMRC can be pretty accommodating.