Legislating for the VAT deferral new payment scheme and deterrent
Published 3 March 2021
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Who is likely to be affected
Businesses which took up the offer to defer VAT payments that would otherwise have been payable with (or in connection with) VAT returns due between 20 March 2020 and 30 June 2020.
General description of the measure
This measure has 2 impacts.
First, it legislates for a commitment given by the Chancellor of the Exchequer on 24 September 2020 as part of the Winter Economy Plan. This commitment stated that businesses which deferred VAT until 31 March 2021 would be given longer to pay, in up to 11 smaller interest-free instalments.
The New Payment Scheme has a straightforward portal which enables businesses to pay their deferred VAT in instalment by direct debit, with the first instalment made in the month that the business opted into the scheme. After that, payments are made in equal monthly instalments.
Businesses can opt into the New Payment Scheme in March, April, May or June but the later they opt in, the fewer instalments they are allowed to make. The opt-in date must be sufficiently early in the month to allow the first payment to have reached HMRC by the end of that month. Briefly:
| Month of opting-in | First payment by end of | Maximum subsequent equal monthly instalments |
|---|---|---|
| March | March | 10 (11 in total) |
| April | April | 9 (10 in total) |
| May | May | 8 (9 in total) |
| June | June | 7 (8 in total) |
Businesses can pay in fewer instalments but there must be a minimum of 2 instalments.
Alternatively, businesses can still pay the full deferred amount by 31 March 2021 or contact HMRC to arrange an alternative way of paying. These options are fully legislated.
Second, the measure provides for a penalty of 5%, chargeable in relation to the amount of the deferred VAT that is outstanding if businesses have not paid in full, opted into the New Payment Scheme or made an alternative arrangement to pay by 30 June 2021. The normal Default Surcharge approach will not apply to deferred VAT.
Policy objective
The measure will provide additional support to businesses during the COVID-19 pandemic, preventing a ‘cliff edge’ deadline at the end of March 2021, giving the important flexibility and a choice of more and smaller instalments at a time of reduced cashflow for many sectors.
The New Payment Scheme is only one measure in a suite of support across HMRC and government. HMRC will continue to offer bespoke and tailored support to businesses who need it through alternative arrangements.
The penalty is a valuable compliance tool to encourage payment of deferred VAT and ensure that non-compliant businesses do not gain unfair advantage over those that pay on time or make alternative arrangements to pay.
Background to the measure
On 20 March 2020, as part of the government’s support for businesses during COVID-19, businesses were given the option to defer their VAT payments due between 20 March and 30 June 2020 to manage their cash flow through the initial stages of the COVID-19 pandemic.
Around 600,000 businesses deferred payments worth an estimated £34 billion. Businesses using the option of deferring their VAT payments must pay by 31 March 2021.
On 24 September 2020, the Chancellor of the Exchequer announced a further support package which included an option for spreading payments of deferred VAT. The New Payment Scheme will allow businesses with deferred VAT to spread their payments over a series of equal monthly instalments from March 2021, interest free. This is a standard offer that businesses can opt in to.
Detailed proposal
Operative date
The New Payment Scheme has been available since February and will remain so until late June 2021. The government intends to bring forward provisions in the Finance Bill to enable the continued operation of the scheme and authorise the Commissioners of Revenue and Customs to administer it.
The penalty with take effect from 1 July 2021. It is intended that provision be brought forward for the assessment of the penalty to be a matter for the Commissioners’ discretion.
Current law
The New Payment Scheme and associated penalty will, if passed into law, be the subject of new provision. There will be consequential amendment to the Value Added Tax Act 1994 c. 23 and related legislation.
Proposed revisions
If passed into law, there will be a consequential amendment to the Value Added Tax Act 1994 c. 23 and related legislation.
Summary of impacts
Exchequer impact (£M)
| 2020 to 2021 | 2021 to 2022 | 2022 to 2023 | 2023 to 2024 | 2024 to 2025 | 2025 to 2026 |
|---|---|---|---|---|---|
| -440 | -30 | Nil | Nil | Nil | Nil |
These figures are set out in Table 1.1: Policy decisions since Budget 2020 and have been certified by the Office for Budget Responsibility. More details can be found in the Policy costings: November 2020 document published alongside Spending Review 2020.
Additional 3 months window for VAT deferral payments via the New Payment Scheme (NPS)
| 2020 to 2021 | 2021 to 2022 | 2022 to 2023 | 2023 to 2024 | 2024 to 2025 | 2025 to 2026 |
|---|---|---|---|---|---|
| -80 | - | - | - | - | - |
These figures are set out in Table 2.1 of Budget 2021 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Budget 2021.
Economic impact
This measure is not expected to have any significant macroeconomic impacts.
Impact on individuals, households and families
This measure is expected to have no impact on individuals as it only affects businesses which have deferred VAT payments due between 20 March and 30 June 2020. This measure is not expected to impact on family formation, stability or breakdown.
Equalities impacts
There are no equalities impacts. This measure will be available to all VAT registered businesses across the UK which deferred the VAT that was due from 20 March to 30 June 2020.
Impact on business including civil society organisations
This measure is expected to have a negligible impact on businesses’ administrative costs. It will provide approximately 600,000 businesses which deferred VAT due between 20 March and 30 June 2020 the option to pay it in up to 11 interest free instalments from March 2021. The New Payment Scheme will be delivered through a simple, self-guided digital portal and Direct Debit (with onboarding help for businesses which are digitally excluded). The customer experience for this scheme is expected to be quick and smooth.
Businesses will face a penalty if they do not pay, or make arrangements to pay, their deferred VAT. The New Payment Scheme will be faster, simpler and more accessible to the majority of customers. A small number of businesses will not be able to use the digital self-serve tool, for example, if they are digitally excluded, if they do not have a UK bank account or if a joint signatory is required on the account. HMRC has developed an alternative payment arrangement for these customers so that they can take advantage of the same terms offered by the New Payment Scheme.
One-off costs include familiarisation with the change to decide whether to use the New Payment Scheme or not and could include registering for the new service and also setting up a Direct Debit. There are not expected to be any continuing costs.
Customer experience could see an improvement as using the New Payment Scheme digital service to opt-in to a standard offer will be faster, simpler and more accessible to the majority of customers.
Operational impact (£m) (HMRC or other)
The operational impacts of this measure have been accounted for in the government’s wider economic response to the COVID-19 pandemic. This measure does not generate any further costs to HMRC.
Other impacts
Other impacts have been considered and none has been identified.
Monitoring and evaluation
The measure will be monitored through information collected from tax returns and receipts.
Further advice
If you have any questions about this change, please contact VAT Infrastructure COVID-19 Policy on email: vatinfrastructurecovid19policy@hmrc.gov.uk.