This article was last updated on 23 June at 10:10.
The Government announced on 20 March that no VAT liabilities need be paid between 20 March and 30 June 2020. This is automatic, and no applications need to be made to HMRC. Organisations will have until the 31 March 2021 to pay off any accumulated liabilities. The deferral is not mandatory and if organisations wish to pay their VAT liabilities during this period they can do so.
If an organisation wishes to take advantage of the deferral but is set up with direct debits to pay their VAT, they should cancel them, as otherwise the banking system will continue to take the direct debits automatically. HMRC cannot cancel direct debits set up by a taxpayer on the taxpayer’s behalf.
If an organisation failed to cancel its direct debit in time, then it is possible to reclaim the VAT which was paid out during this period by contacting your bank under the Direct Debit Indemnity Scheme and requesting a refund.
For payments which start to become due after 1 July, you are now advised to reinstate your direct debits.
VAT returns should continue to be submitted as normal throughout this period.
The return periods affected are returns ending in February, March and April due for payment in April, May and June respectively.
HMRC has now also confirmed that deferral will apply to advance payments under the annual accounting scheme, as well as payments on account and balancing payments which fall due between 20 March and 30 June. Where balancing payments fall due after 30 June, then the amount payable is the amount shown as due on the VAT return in Box 5 less any deferred POAs made between 20 March and 30 June.
The deferral scheme applies to all entities which are registered for UK VAT.
Whilst HMRC is itself disrupted by COVID-19, they aim to process repayments within five days which is welcome. We have also noticed that disclosures of errors in taxpayer’s favour appear to be being processed more quickly than those showing errors in favour of HMRC.
The following comments may also assist. If you have specific queries, please get in touch with your usual haysmacintyre contact.
Time to Pay (TTP)
The announcement in the Budget of additional support in respect of TTP tax debts applies to VAT as it does to other taxes. The link to the HMRC website can be found here.
The key point seems to be that there has to be an actual debt before HMRC will fully engage in discussing TTP arrangements. There is no harm in trying to approach them earlier, but do not be surprised if you get little help until such time as a VAT return has been submitted and is due for payment as HMRC.
There has been no announcement of any suspension of routine VAT inspections, and HMRC do have the legal power to carry them out. However, given Government guidelines on social distancing, you should feel confident about asking HMRC to conduct these remotely should they contact you.
In many cases HMRC already conduct a number of inspections remotely, and we can assist you in drafting responses to HMRC enquiries by letter or email to make sure the process runs as smoothly as possible.
However, whilst there has been no formal suspension of the VAT visiting programme many staff have been transferred to other areas, and we have become aware of HMRC writing to clients either wanting to close enquiries or asking if a client wants the inspection suspended until after the pandemic has subsided. There is no obligation on you to agree to suspending an inspection and in many cases, it would be better to allow it to continue until it is concluded.
Zero-rating for Personal Protective Equipment
The Government has announced that a temporary zero-rate will apply to all supplies of Personal Protective Equipment (PPE) between 1 May and 31 July 2020 which are recommended for use by Public Health England in its guidance dated 24 April 2020 'Guidance, COVID-19 personal protective equipment (PPE)'.
- Disposable gloves
- Disposable plastic aprons
- Disposable fluid-resistant coveralls or gowns
- Surgical masks – including fluid-resistant type IIR surgical masks
- Filtering face piece respirators
- Eye and face piece protection – including single or reusable full face visors or goggles
This zero-rate does not affect items which were already zero-rated or exempted from VAT under other parts of the VAT legislation, only standard-rated items of PPE.
Whilst the VAT on such items would have been largely recoverable by the NHS and palliative care charities the measure provides a helpful cash flow benefit, whilst for care homes making exempt supplies of care which could not recover VAT it creates an outright saving.
Zero-rating on e-publications
In his first Budget in March the Chancellor announced that he was planning on extending the zero-rate which applies to printed matter to digital publications. This was originally going to be introduced with effect from 1 December 2020 with the relevant legislation being introduced in an Autumn fiscal event.
It was announced on 30 April that he has brought forward the zero-rating of digital publications to take effect from 1 May. The Treasury announcement of this measure talked at some length about this being brought forward because of the savings this could bring to the public during a period when people were more reliant on digital publications during the pandemic. But this presupposes that a publisher would pass on amounts previously paid over to HMRC as VAT back to customers by way of a saving of, for example, £2 on a £12 e-book. But there is nothing to prevent publishers from maintaining their price at £12 and simply keeping the additional £2 which would previously have gone as VAT to the Treasury, particularly since such publications would most likely have been held out for sale for £12 on a VAT inclusive basis with no mention of VAT.
Options to tax
Supplies of non-residential land and property are exempt from VAT but it is possible to opt to tax them which converts the supply into a taxable supply. Making an option to tax is a two stage process. The making of the option to tax is simply the conscious decision that you want to opt to tax. But, you then have to notify HMRC of your decision using a Form VAT 1614A. The notification should be made within 30 days of the decision to opt.
However, as a result of COVID-19 HMRC has extended the period in which you can notify HMRC from 30 days to 90 days for options made between 15 February and 31 May.
Change of use
The construction of certain buildings can be zero-rated if they are intended to be used for a qualifying purpose, such as a relevant residential purpose or a relevant charitable purpose.
If a building ceases to be used for a qualifying purpose within a period of ten years then the customer becomes liable to pay an amount equal to the VAT which was originally not charged. HMRC have now said that if the intended use changes as a direct result of COVID-19, then you should contact either your customer compliance manager or the charities compliance team by email at: email@example.com
The mention of this in the update to the HMRC Notice does not say what action HMRC will take, but the clear inference is that HMRC may waive the deemed supply payment if the change of intention was brought about by COVID-19 and is outside a taxpayer’s control.
Reasonable excuse defence
When errors are made with regard to VAT, or return submissions or payments are late then HMRC can impose penalties in respect of those errors or late payments.
Where there is a reasonable excuse for the error or default it is a defence against a penalty being imposed. The legislation does not specify what a reasonable excuse is but it does state that certain things do not qualify as a reasonable excuse, such as reliance on another person to get your VAT declarations correct, or an insufficiency of funds to pay your VAT.
Case law has, however, held that an insufficiency of funds arising from an unanticipated factor or combination of factors can constitute a reasonable excuse. HMRC has now stated that, depending on the facts COVID-19 could give rise to a reasonable excuse defence against a penalty. For example, if the insufficiency of funds was caused by customers closing down as a result of COVID-19 then one might be able to argue that the insufficiency of funds was not down to any action or inaction by you but was a result of a wholly unanticipated set of circumstances and you therefore have a reasonable excuse.
Appeals against HMRC decisions
Where HMRC issue a decision in respect of a taxpayer’s VAT affairs and the taxpayer disagrees with HMRC’s view then the taxpayer normally has 30 days in which to request a review of the decision, or to appeal directly to the First-Tier Tribunal.
HMRC has now said that as a result of COVID-19 they will allow an extra three months to appeal against any decision dated February 2020 or later. You should send the request for review as soon as possible within this time and explain that the delay is down COVID-19.
If you disagree with the outcome of the review and then wish to appeal to the Tribunal you have 30 days in which to do so. HMRC will not object if your review decision is dated February 2020 or later and you lodge an appeal within three months of the normal deadline.
Technically a Tribunal could still refuse to hear an out of time appeal, but they would not normally do so if HMRC did not object to it being heard.
Bad Debt Relief
Lastly, remember the Bad Debt Relief provisions. If you have made a supply of goods or services to a customer and accounted for VAT on that supply to HMRC but have not been paid within six months, then you are entitled to claim Bad Debt Relief. Many businesses do not take advantage of this relief but perhaps now is the time to introduce greater financial discipline.
The relief works as follows. Firstly, VAT must have been charged and accounted for to HMRC on your VAT return. You become entitled to claim it six months after the date the payment became due, so if your payment terms are 30 days then you need to wait seven months, so now is perhaps a good time to review client accounts.
The debt must be taken out of your day-to-day VAT account and written off in your books as a bad debt. HMRC guidance refers to the debt having been transferred to a separate “refunds for bad debts account” but this need be nothing more than a spreadsheet.
This does not mean you have to stop chasing the debt or regard it as irrecoverable.
You cannot claim relief if the debt has been paid, sold or factored under a valid legal agreement.
The claim has to be made within four years and six months. Counter intuitively you make the claim by including it in Box 4 of the VAT return on which you are making the claim as if it were input VAT, rather than negative output VAT.
You need to have a copy of the VAT invoice and the records showing VAT was charged and accounted for to HMRC on an earlier VAT return. If a customer has paid you in part, then VAT remains due on the part they have paid, and relief is only available on the unpaid part. If there is more than one unpaid invoice, then unless a customer has specified that a payment relates to a specific invoice then payments are allocated to the earliest debt.
If a customer subsequently pays you, then you must account to HMRC for VAT on the amount that has now been paid and for which you have claimed relief.
As ever, there is a sting in the tail, which is that if you have not paid a supplier but have claimed input tax on their invoice, then you must reverse that input tax claim six months after you were supposed to have paid them.
As a result of the COVID-19 pandemic, HMRC have now announced they are no longer accepting hard copy VAT 652 Error Correction forms. These should now be emailed to HMRC at firstname.lastname@example.org.
Making Tax Digital for VAT
Also as a result of COVID-19, HMRC has announced an extension of the “soft landing” period for Making Tax Digital until 1 April 2021. We attach a link to a separate article on this here.
VAT reverse charge on construction services
A reverse charge on domestic construction services was due to be introduced on 1 October 2020. The introduction of this provision had already been delayed, as it was due to come into force in October 2019. That was delayed by a year until October 2020, but has now been delayed by a further five months and will not now come into force until 1 March 2021.
The charge only applies where payments are required to be reported through the Construction Industry Scheme (CIS) except where the customer uses the building or construction services themselves, rather than for selling on.
Under the reverse charge the customer, not the supplier, accounts for the VAT.
If you wish to discuss VAT and/or any other COVID-19 related initiatives, please contact your usual haysmacintyre contact or email CV19@haysmacintyre.com.