The UK government has announced a range of emergency tax measures designed to help businesses deal with the fallout from the COVID-19 outbreak, including a deferral of VAT payments and a relaxation of Time to Pay rules. Although the announcements are welcome, businesses need to be careful to continue to comply with record-keeping and filing measures which continue to apply. It is yet to be seen whether further measures will be required in light of the closure of all non-essential business premises.
The government has announced that VAT payments due between 20 March 2020 and 30 June 2020 will be deferred. Taxpayers will be given until the end of the 2020 to 2021 tax year to pay any liabilities that have accumulated during the three month deferral period. This means that the VAT payment due on either 7 April, 7 May or 7 June 2020 (for businesses which pay quarterly) or the monthly payments due on each of those dates (for businesses which pay monthly) will be deferred, with the deferred payments being due by the end of 2020/21 tax year. There is no need to make an application for the deferral to apply – this simplicity must be welcomed. However, those companies with direct debits to pay their VAT to HMRC will need to cancel them (and set them up again after the deferral period) as it is not yet clear that HMRC could cancel them unilaterally for the deferral period.
Although this measure benefits all businesses, the impact may be less advantageous than expected for businesses that have had significant reductions in sales or have already shut down. These businesses are likely to see costs exceed income for many of the VAT periods covered by this deferral, in which case there is unlikely to be any net VAT payable anyway.
The payment deferral will also apply to tax payers that use non-standard arrangements such as the flat rate and cash accounting schemes.
For traders facing non-payment by customers in the periods covered by this deferral, a bad debt relief claim could be in once the six-month period expires, meaning that, oddly, a taxpayer could get an output tax credit before making the payment of the original output tax.
This measure is only a deferral of the obligation to pay; it does not remove the need to file returns for the affected periods. Traders need to continue to comply with record-keeping and filing obligations otherwise there will be a risk of filing penalties applying (see below). Additionally there was no mention of interest charges on any deferred VAT being waived, unlike in the announcement dealing with the income tax self-assessment deferral (see below).
Time to Pay
HMRC has announced a relaxation of the criteria for Time to Pay arrangements under which taxpayers can agree staged payments of outstanding tax liabilities for tax liabilities for which all businesses and self-employed are eligible. The arrangements cover both tax payments that are already late and anyone who might miss the next payment due to COVID-19. The arrangements can include cancellation of penalties and interest where taxpayers have “administrative difficulties contacting or paying HMRC immediately”.
The terms being offered have not yet been set out, but for businesses in financial difficulty this must be an attractive option.
Income tax self-assessment deferral
For self-employed persons liable to pay income tax under self-assessment the government has announced the next payment (due on 31 July 2020) will be deferred until 31 January 2021 with no penalties or interest payable. This will be of help to self-employed workers who do not (currently) have the benefit of their employers receiving the income support under the Coronavirus Jobs Retention Scheme. It is expected that the measure also applies to professional partnerships.
There is no specific relief dealing with the late payment (or non-payment) of corporation tax liabilities so an application for Time to Pay ahead of the payment date is likely to be the best option for companies suffering cashflow difficulties. For businesses with calendar year-end accounting periods, the September 2020 payment obligation may appear some time off but it might be prudent to plan ahead. Large corporates – those with taxable profits over £1.5m –pay corporation tax in quarterly instalments. For those with calendar accounting year-ends, the next payment will be in April then July, October and January. April may be the most difficult for a company to finance because it will be based on last year’s profits. Indeed for many traders a simple deferral of this payment, based on 2019 profits, might have been more useful than the VAT deferral.
The delay in the introduction of the planned IR35 reforms is still causing practical issues for businesses in deciding whether to press ahead with revised arrangements which will comply with the new rules or to allow contractors to continue to use personal service companies (PSC). Tax liabilities would be self-assessed by the PSC, but there remains a risk of exposure under the Criminal Finances Act which would need to be evaluated on a case-by-case basis. This choice has been made more complex because the government’s recently announced Coronavirus Job Retention Scheme only applies to employees on PAYE (for further detail on the scheme please see our Insight here). The House of Commons Public Bill Committee has proposed an amendment to the Coronavirus Bill to provide similar protection to the self-employed, which as a potentially significant proposal will need to be tracked.
Compliance and penalties
None of the announced measures changes the administrative obligations laid down by the tax system. Businesses should still keep necessary tax records, file returns, maintain senior accounting officer records and so on.
There might be a temptation to prioritise managing other issues in the business and take a risk on penalties for non-payment, or late payment of tax liabilities. Penalties are, of course, highly fact sensitive. While inability to pay is not a reasonable excuse under penalties legislation, the argument outlined in the Steptoe case that a sudden and unforeseeable external event could be a reasonable excuse, may apply. However, sudden drops in income caused by external events do not always provide a defence (for example Timothy Raggett QC v HMRC  UKUT 412 (TCC)). In any event the defence does not directly apply to late filing penalties.
The prudent position must therefore be to ensure filing for tax returns is maintained and late payment of any tax liabilities is covered in advance by a Time to Pay agreement with HMRC.