Sarah Halsted

Written by: Sarah Halsted

Sarah Halsted

Associate Director

Think your Covid VAT arrears are dealt with? Think again…

When coronavirus lockdowns first began to restrict trade last spring, the Government brought in a range of Covid relief measures for business, one of which allowed VAT registered organisations to defer payment of the VAT that was due on their VAT returns to be filed between 20 March and 30 June 2020. The Chancellor initially said this VAT must be paid back by 31 March 2021, but HMRC subsequently created the New Payment Scheme (NPS) under which businesses could opt to extend the repayment period by paying the arrears in up to eleven interest-free monthly payments during the 2021-22 financial year.

The NPS, which closed to new applicants in June 2021, has proved to be very popular, with thousands of businesses signing up before the deadline to make their payments by direct debit. Those who opted in on time are now sitting back and watching the payments leave their bank account every month until the deferred VAT is fully cleared by January or February 2022.

However, reports are emerging of instances where HMRC has used current VAT repayments to offset the remaining Covid debt instead of paying them to the claimant as a VAT refund. It appears that HMRC’s system does not separate Covid arrears and NPS repayments from the taxpayer’s general VAT account, meaning any VAT repayments that arise before the deferred VAT is fully paid off could be automatically offset against what remains of the Covid debt.

This issue is most likely to affect businesses who claim occasional, rather than regular repayments of VAT from HMRC; for example a one-off repayment claimed on a VAT return for an asset purchase, or a repayment arising from an error correction notification to HMRC for VAT overpaid in the last four years. This will be unwelcome news for most claimants, as VAT repayments in those circumstances are usually required to settle a particular bill, e.g. to reimburse overcharged customers, or make a payment against a loan for an asset purchase.

These offsets could cause particular problems for construction businesses applying the new Domestic Reverse Charge (DRC) for construction services, which came into force on 1 March 2021. These were predominantly net payers of VAT during the 2020 deferral period (so may be carrying a considerable Covid debt) but are now claiming repayments on their VAT returns. The DRC has already put pressure on sector cashflow because construction business can no longer collect VAT from their customers which can be used as working capital until it needs to be paid to HMRC. The offset of their new monthly VAT refunds against their Covid arrears will only compound these problems.

While HMRC has the right to offset VAT credits against VAT debts, it does sometimes agree to reverse an offset where the taxpayer has raised particular concerns about its impact. However, such negotiations put an additional and unexpected burden on businesses that could have been forgiven for assuming that their NPS payments were similar to a separate loan from HMRC.

Finally, those who decide not to object to an offset will need to make sure they check their VAT account and cancel their direct debit early if they have repaid all of the deferred VAT before their NPS payments were due to end. If not, they run the risk of HMRC accidentally double charging them for some of their Covid arrears, by continuing to take direct debit payments after the debt has been cleared.

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