Deferred VAT Payments and How to Manage Them

Corporate taxes are a hot debate in the UK, as small businesses calculate the impact of new rules for employers amid rising bills and increased running costs. Companies are naturally looking for ways to combat financial pressures, from hiking their prices to exploring options like deferred VAT and payment plans.

In this article, we discuss who qualifies for deferred VAT payments, how it works and the pros and cons. Plus, we outline finance solutions businesses should consider.

What is deferred VAT and how does it work?

Deferred VAT means an agreement allowing businesses to delay the payment of VAT owed to HMRC. It’s typically agreed as a result of a widespread event that impacts business operations and revenue, such as the COVID-19 pandemic, exceptional circumstances causing financial difficulties or when importing goods. 

Also, some leasing companies waive the usual requirement for paying VAT upfront in a hire purchase agreement, letting companies pay it once VAT has been recovered on the asset after submitting their tax return.

Eligible organisations can defer VAT payments to stop them from causing cash flow issues and affecting other liabilities. It’s essentially a period of grace to give companies breathing space to make their required payments.

It’s important to note that businesses remain liable for the full amount of VAT deferred, they just get an extended period for settling the debt. 

When do I have to pay my deferred VAT?

This depends on the deferred payment scheme or arrangement with HMRC or third parties. You may be allowed to pay deferred VAT in instalments based on your circumstances. Alternatively, you may need to pay in full before a newly agreed deadline. 

For example, any business that deferred tax payments during the global pandemic had until March 2021 to pay back what they owed in full (unless an extension was arranged) or join the online VAT deferral new payment scheme to spread deferred VAT payments in interest-free instalments (applicable between March 2021 and March 2022).

If you negotiate a Time to Pay (TTP) arrangement for VAT with HMRC, terms are bespoke, but it usually consists of paying back VAT owed in monthly instalments.

Businesses that apply for a duty deferment account (DDA), for customs duties and VAT when importing to the UK, pay monthly amounts instead of for individual shipments.

Deferred VAT vs postponed VAT: What’s the difference?

While deferred VAT can refer to arrangements with HMRC to delay payments due to financial issues caused by unforeseen events, deferrals can also be agreed between HMRC and companies importing goods to the UK. 

When importing goods, businesses must pay customs and excise duties and VAT when the goods enter the country or are released from excise warehouses. Companies can apply to defer VAT or use postponed import VAT accounting (PIVA).

Although similar, in that they delay VAT liabilities, there is a distinct difference:

• Deferred VAT on imports allows you to set up a DDA and pay import VAT and customs duties by monthly direct debit.
• Postponed VAT lets you declare and recover import VAT on the same VAT return, rather than paying it upfront at the border. The postponed VAT accounting system was introduced post-Brexit in 2021 to reduce cash flow impact by enabling importing companies to offset VAT in the same financial period while avoiding goods being held in customs until the VAT is paid.

While both are useful for companies that regularly import goods, postponed VAT only applies to VAT, not the customs and excise duties. Plus, with deferred import VAT, you’ll need to provide a financial guarantee, unless a waiver is agreed. 

See HMRC’s page on deferring duty payments for more information on these waivers.

Can your business defer VAT payments and how does it qualify?

Here are some of the ways you can qualify for deferred VAT payments:

• You’re a VAT-registered company with a clear need to defer payments.
• A significant event or economic change has significantly impacted your business operations and finances.
• Your company regularly imports goods into the UK and wants to set up a deferred VAT accounting to pay monthly import VAT and duties.
• You want to lease/hire business equipment or vehicles, where the lessor agrees to defer your VAT on the assets for an initial period.

If you qualify for a government VAT deferral scheme, you can be granted a period of grace to bounce back from the impact of certain events. Or you can enter a TTP arrangement with HMRC for VAT. The latter is a payment plan that spreads the cost of outstanding VAT bills.

You can consolidate your VAT with other tax liabilities to get on top of your debts and ease cash flow issues but this is subject to negotiation with HMRC. 

When do deferred VAT payments need to be made?

Dates and deadlines for deferred VAT payments depend on the scheme you enter and your circumstances. Be clear on your key conditions and deadlines, setting reminders and planning other tax liabilities around impending dates.

Managing import VAT using the postponed accounting system means reporting VAT owed for importing goods in regular VAT returns, while deferred import VAT involves making monthly direct debit payments.

For other deferred VAT or VAT payment plans, you can regularly check your HMRC account to see your current tax status, personalised TTP arrangement details and remaining liabilities and deadlines.

Can I pay my deferred VAT in instalments?

You may be able to pay deferred VAT in instalments, but it depends on your specific agreement. If you negotiate a TTP arrangement, your business will make a pre-agreed number of instalments until your debt is repaid. HMRC charges interest on monthly repayments (currently at the Bank of England’s base rate plus 2.5%). 

These are bespoke agreements, designed to match your financial capabilities. So, be realistic about what you can afford to ensure manageable monthly repayments and avoid future penalties for late tax payments.  

HMRC deferred VAT payment process: Key steps involved and how it affects financial planning

So, what happens if you qualify? How does the deferred VAT process work? Let’s look at the key steps involved and how deferral agreements affect your financial planning.

Key steps in deferring VAT payments with HMRC

To apply for a VAT payment plan, you should follow these steps:

• Prepare details of your incomings, expenses, assets, liabilities and other relevant business information.
• Ensure you’ve filed all your tax returns and contact HMRC promptly to explain your circumstances and reasons for needing more time to pay your VAT bill.
• Propose realistic monthly repayments to align with your cash flow.
• Inform HMRC if your circumstances change – TTP agreements are flexible, so you can adjust payment plans and renegotiate terms, where required.

If you want to set up a duty deferment account (DDA), these are the key steps involved:

• Check if you’re established in the UK for customs purposes.
• Apply for a DDA through your HMRC account or the CDS Financial Dashboard, HMRC’s dedicated Customs Declaration Service platform.
• Provide all necessary business and financial details, plus things required for importing and exporting, like your Economic Operators and Registration and Identification (EORI) number – learn what you need to apply for a DDA.
• Request a deferment guarantee waiver, if eligible, which means you don’t need to provide a financial guarantee as part of the agreement.
• If you don’t qualify for a waiver, set up a deferral guarantee to secure deferrals on import VAT.
• Once approved, you’ll receive a Deferment Approval Number (DAN) from HMRC, which you’ll need to declare on your customs import declaration to allow your VAT and duty costs to be deferred.
• Set up a direct debit for your DDA to pay HMRC import VAT/duties monthly.
• Use the CDS platform to check your HMRC deferred VAT statement and make sure details are accurate.

How deferred VAT affects cash flow and financial planning

While using a deferred VAT payment scheme can ease short-term financial pressures and cash flow issues, delaying tax payments can lead to future operational bottlenecks and mounting financial liabilities.

So, align your payment plans and deferred VAT with your cash flow to maintain healthy working capital. This is crucial for businesses heavily impacted by seasonality.

Common mistakes to avoid when repaying deferred VAT

Deferring VAT payments has various business benefits, particularly for easing cash flow during tricky times or when importing goods to the UK. However, there are several pitfalls to avoid.

Here are some of the common mistakes businesses make with deferred VAT payments: 

• Missing payment deadlines: If you don’t keep abreast of impending deadlines (for deferred VAT and other corporate tax liabilities), you’ll incur tax penalties from HMRC, which only compounds your situation. So, don’t rely solely on HMRC reminders; keep your own schedule.
• Not setting aside sufficient funds to cover deferred VAT obligations: Again, inadequate corporate tax planning can lead to shortfalls in key fiscal periods, which may result in missed deadlines, penalties and various knock-on effects.
• Misreporting or excluding VAT on tax returns: Errors in tax returns or deferred VAT statements can also put you in hot water with HMRC and may lead to fines and even investigations, especially for recurring issues.

What happens if I miss my deferred VAT payment deadline?

If you miss your deferred VAT payment deadline, you’ll be subject to HMRC’s fines for late VAT payments. For VAT, penalties are charged as a percentage of what is owed – 2% for payments between 16 and 30 days late, then another 2% charge on what’s owed on day 30, if payment is still outstanding after 31 days. Daily penalties then accrue at 4% per annum until your outstanding amount is paid.

Head to our guide to late payment penalties to learn about fines, thresholds and recurring charges for late tax payments. 

Alternative financing options for covering VAT liabilities

While seeking to defer VAT payments or arrange a payment plan can delay or spread the cost of your tax liabilities, there are alternative business finance solutions to consider that may be suitable. You could use a dedicated tax loan to cover your VAT or explore alternatives like invoice finance to get fast access to funds to pay tax bills.

Here are some of the alternative VAT finance options to choose from:

• VAT loans: These business loans for VAT bills see lenders pay what’s due directly to HMRC while your business makes monthly repayments (plus interest) – usually between 3-12 months. 
• Short-term lines of credit: You can use a line of credit to draw down funds as and when required, particularly around key financial periods, to cover tax bills.
• Invoice finance solutions: There are various types of invoice finance but they all help unlock working capital tied up in pending client invoices.
• Working capital loans: These are loans specifically for operational purposes, and can be used for paying VAT owed without affecting cash flow.
• Flexible business loans: Typically issued by digital lenders, such as iwoca, these short-term loans are ideal for businesses that need flexible borrowing conditions to cover tax liabilities whilst maintaining operational stability.

These finance solutions enable you to pay your VAT bills without disrupting day-to-day operations​​, helping you avoid penalties from HMRC and build credit.

Iwoca’s Flexi-Loans are a great short-term finance option for small businesses that run into difficulties with tax bills from time to time. You can borrow between £1,000 and £1,000,000 for a few days up to 60 months. Draw down funds as and when required to cover your VAT bills and support other operational needs. You only pay interest on funds you use and we don’t charge early repayment fees.

Our flexible loan solutions can ease tax pressures in key financial periods, allowing you to reclaim VAT later without stressing over liquidity. Plus, you may not qualify for deferred VAT, so this way, you pay VAT on time and enjoy manageable repayments. 

Find out how to get a business loan with iwoca and use our small business loan calculator to work out your likely monthly repayment costs. 

Sources:

• VAT Deferred Due to Coronavirus (COVID-19) [Gov.uk]
• How to Pay a Debt to HMRC with a Time to Pay Arrangement [Gov.uk]
• How to Apply for a Duty Deferment [Gov.uk]
• When You Can Account for Import VAT on Your VAT Return [Gov.uk]
• Guarantee Waivers for a Duty Deferment Account [Gov.uk]
• Postponed VAT Accounting [Sage]
• If You Cannot Pay Your Tax Bill on Time [Gov.uk]
• How to Handle HMRC Tax Penalties: A Guide for UK Small Businesses [iwoca]
• Guide to VAT Payment Plans for Cash Flow Management [iwoca]
• Understand VAT loans [iwoca]

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