
During the initial lock down due to Covid HMRC allowed businesses a VAT payment delay. Many VAT registered businesses chose to take up this useful way to manage their cash flow at a difficult time.
However, this was only a delay and the condition given at the time was these payments would need to be made in March 2021. At the time many people hoped that this would be enough time for businesses to get back on an even keel and therefore they would be ready to pay this.
VAT payment delay updated terms
However, the government has now updated how the repayment will work. This reflects that many businesses are still in a difficult cash flow position. They are now offering either a full repayment in March or to spread the cost over between 2 and 11 payments.
Businesses which therefore deferred VAT payments due to Covid-19 now have a choice: pay up front or spread the cost.
There are pros and cons to both options but you need to make a decision. One way of thinking about this is that the VAT payment delay was effectively an interest free loan from the government. VAT is money collected on behalf of HMRC and you are being given the choice of paying in a single instalment or spread over several months.
Factors to consider
Factors to consider include:
- Cash flow. The first and obvious thing is to consider your bank balance. Does your business have enough cash to pay up front?
- Admin: Consider whether is it administratively easy for you to spread the cost. Would you find it simpler to pay it once?
- Interest: Interest rates on deposit accounts are low at the moment, but it may be worth reviewing this. How much interest you could potentially gain by delaying payment? How much interest you will pay if you need to use an overdraft?
- Psychology: if there isn’t a major preference due to cash flow, admin or interest payments consider your preferences. Which method of payment will work for the way you manage your money?
Further reading
You may find it useful to read up on how to reclaim VAT on mileage.
If you employ staff find out how to give them a tax break or tax free payment for home working.