Other VAT measures for businesses
- Cancelling a VAT registration
- Monthly VAT returns
- Ensuring all input tax is claimed
- Tour operators margin scheme
- Consider issuing requests for payment or proforma invoices
- Payments on account (POA)
- Bad Debt Relief claims
- Terminating or amending contracts
Cancelling a VAT registration
Smaller businesses that consider that they will now be trading under the VAT deregistration threshold may wish to consider cancelling their VAT registration number. However, before making a decision to cancel a VAT registration number, businesses, or their advisers, need to remember that it may be necessary for the business to account for VAT on any stocks and assets on hand at the time of deregistration, which would include properties subject to an option to tax. Businesses may also be required to make capital goods scheme adjustments for any capital items. These factors may make cancelling the VAT registration an unattractive option at this time, especially if the business is facing cash flow issues. See the Cancelling a VAT registration ― points to consider, Overview of the option to tax and Capital goods scheme ― intervals and adjustments guidance notes.
According to Notice 700/11, businesses can voluntarily cancel their VAT registration number when any of the following occurs:
- the business can satisfy HMRC that its taxable turnover in the next 12 months will not exceed the VAT registration cancellation limit, which is currently £83,000
- a decision is made to close down part of the business and satisfactory evidence can be provided to HMRC that the taxable turnover for the remainder will not exceed the VAT registration cancellation threshold
- the turnover exceeds the registration limit but the taxable supplies are wholly or mainly zero-rated. If the business makes any standard-rated supplies, it can only cancel its VAT registration voluntarily if its input tax normally exceeds its output tax; if these circumstances apply, the business should then write to the VAT Registration Service explaining why it thinks it should be exempt from registration
If the business is requesting voluntary VAT registration cancellation on turnover grounds, it will need to tell HMRC why it thinks its turnover is going to fall below the VAT registration cancellation limit; for example, reduced opening times, lost contracts or changes to business practices. HMRC should also be advised regarding what the business expects its turnover will be in the following 12 months. When calculating the turnover, it should be done on a VAT-exclusive basis.
It is important to note that HMRC will not allow a business to cancel its registration if the reduction in its turnover is the result of an intention to stop trading or suspend making taxable supplies for 30 days or more in the next 12 months.
Businesses that meet any of the above conditions can use the online service to notify HMRC that they wish to cancel their VAT registration number. Businesses can also complete form VAT7: application to cancel your VAT registration and send it to HMRC through the post.
Monthly VAT returns
If the business now finds itself in a VAT repayment situation (ie its input tax is greater than its output tax) then it may wish to consider moving onto monthly VAT returns as this will speed up the repayments from HMRC. Businesses should ensure that their monthly VAT return is filed as quickly as possible after the month-end to speed up receipt of the repayment. Businesses can change onto monthly VAT returns using their VAT online account.
Ensuring all input tax is claimed
Businesses may have historically only recovered input tax on invoices that had been processed up to the end of the accounting period. It may be worthwhile undertaking an exercise to identify any invoices that have an invoice date in the VAT return period that have not been processed, and manually include these invoices on the VAT return, in order to get the VAT repaid as quickly as possible. Businesses will need to ensure that they make an adjustment for this input VAT on the next VAT return in order to ensure that VAT is not recovered twice.
Businesses may also wish to undertake an exercise to make sure that all input tax is claimed on employee expenses, overseas VAT refunds, etc. See the Reclaiming input tax on miscellaneous expenses, Overview of VAT recovery on employee related expenses and Overseas VAT refunds guidance notes for more information.
Tour operators margin scheme
The travel industry is another business sector that will be significantly affected by the crisis, and for any businesses using Method 2, it may be worthwhile considering using Method 1. Method 1 could be more beneficial as the tax point is determined by the date the customer departs rather than the date of payment, and if the holiday is cancelled, no tax point arises so it is not necessary to account for VAT on any deposits received. See the TOMS calculations guidance note.
Consider issuing requests for payment or proforma invoices
Where possible, businesses may wish to start issuing proforma invoices or requests for payment rather than a tax invoice as no tax point is created at this time. Businesses will obviously need to account for VAT when a tax point is created, but issuing one of these documents at the relevant time may delay the requirement to account for VAT, which could aid cash flow.
Payments on account (POA)
If the business has opted to defer payment of VAT, this may be one to consider once the deferral period has ended.
Businesses making POA may wish to consider whether there is any opportunity to reduce the level of the payments. See the Payments on account (POA) guidance note.
Businesses that consider that their total VAT liability has decreased by at least 20% can write to HMRC to request that the POA amount is reduced. The request can be based on either the total liability incurred in any completed year ending after the reference period or on the anticipated level of turnover for the current year that has started but not ended.
Businesses that become aware that their turnover has decreased to below £1.8m within any completed year after its reference year can submit a written request to HMRC to be removed from the scheme.
Businesses with a total VAT liability in the reference year that falls below £2.3m will be automatically removed from the scheme six months later.
Businesses wishing to amend their POA or be removed from the scheme should write to HMRC’s Payments on Account team explaining why they believe the instalments should be reduced or stopped. The POA should continue to be made at the same level until written permission has been received from HMRC.
Businesses submitting a POA could also make a decision to change onto monthly VAT accounting or pay the actual VAT liability for the previous month if this would be more beneficial from a cash flow perspective. This may be more advantageous if it takes time for the business’ turnover to pick up again once the crisis is over. However, it is important to note that businesses electing to pay the previous months VAT liability must do it for at least 12 months. Businesses wishing to use this option should write to the Payments on Account Team.
Bad Debt Relief claims
Businesses that have not been paid by their customers may wish to see if they can claim VAT Bad Debt Relief on the amount due if they meet the relevant conditions. See the Claiming VAT bad debt relief (BDR) guidance note.
Terminating or amending contracts
Coronavirus is undoubtedly affecting all businesses and causing contracts to be delayed or cancelled, and legal action may be taken as a result. Businesses must ensure that they consider the VAT consequences of any amendments or cancellation, especially if goods and / or services have been provided under the contract.
If a business terminates a contract in exchange for a termination payment, it is necessary to consider whether that payment is liable to VAT. If the contract includes a clause that allows the parties to terminate the contract early, the payment is likely to be treated as compensation, and no VAT should be due.
If the payment is treated as a supply of a ‘right to terminate’, this may be subject to VAT. This situation arises where the contract does not contain any specific clauses that gives either party the right to terminate the contract early and a separate agreement is drafted that provides the parties with a right to terminate the contract in exchange for that payment.
It would be advisable for a business to ensure that these payments are exclusive of VAT in order to enable the business (subject to commercial considerations) to seek payment of the VAT at a later date should HMRC determine that the payment was liable to VAT. However, if the customer cannot recover the VAT (ie because they make exempt supplies), then for the sake of any ongoing relationships, the amounts may need to be treated as VAT inclusive.
If a payment is made in order to settle a claim, the business will need to determine whether the amount has been paid in respect of a supply of goods and services made. If so, it is unlikely that HMRC would accept that this payment is compensation that is outside the scope of VAT. HMRC is is more likely to consider that the payment has been made for the goods or services supplied, and the payment will be liable to VAT.
The original contract should be studied to see what the terms and conditions were in respect of cancellation or early termination of a contract.
See the Consideration guidance note for more information.
VAT treatment of government COVID-19 grants for businesses
The COVID-19 grants announced by the Department for Business, Energy
& Industrial Strategy (BEIS), which includes the Small Business Grant and the Retail, Hospitality and Leisure grant as well as grants via the Self-Employment Income Support Scheme are outside the scope of VAT. Therefore businesses are not required to account for VAT on any grants received. These grants should be ignored for the purposes of determining the level of turnover for VAT registration and deregistration thresholds.
Businesses should also bear in mind that the receipt of a grant should not automatically be treated as non-business for the purposes of determining whether input tax can be recovered. If the grant is being used to support taxable business activities, then input tax should be recoverable in the normal way.