In this tax article Andrew Needham looks at various ways of easing the pain of paying your VAT bills.
How and when to pay VAT
Unless a business is in trouble with HMRC or receives regular repayments, they normally submit quarterly VAT returns. It is now mandatory for both the VAT return and the payment to be made electronically and payments must be received by HMRC (not just sent) seven days after the end of the month following the end of the VAT period – so if your VAT return period ends on 31 December, HMRC must have your return and payment by 7 February.
Late VAT payments
If you are late paying your VAT then you will receive penalties known as ‘surcharges’ which can be as much as 15% of the VAT due.
VAT payments
Electronic payments can be made by Direct Debit, Faster Payments by internet/telephone banking, CHAPs, BACS Direct Credit, Online debit or credit card using BillPay and payment by Bank Giro Credit.
The best way to ensure that payments are made on time is to set up a Direct Debit. Payments are automatically taken from your account and all you have to do is make sure your VAT return is submitted on time; everything else is done automatically. The other VAT payment methods require your intervention and a knowledge of the processing times for payments to go through, which can result in late payments.
Spread VAT payments through the year
Many businesses have difficulty managing their cashflow so that they have sufficient funds to pay their VAT return at the end of the quarter. One way to ensure you have sufficient funds is to work out your net VAT liability at the end of each month and then transfer it into a high interest account so that you have the money available to pay HMRC at the end of the quarter.
It takes discipline to do this, but it is worth it and a similar exercise can be done with your personal and/or company tax to spread the cost throughout the year.
If your turnover is less than £1,350,000 per annum you can use cash accounting so that you only have to account for the VAT on your sale when you get paid. You get automatic bad debt relief and don’t have to pay the VAT on money you haven’t received. On the down side, you can only claim back VAT when you have paid the bill.
Pay VAT monthly
If your turnover is less than £1,350,000 you can use annual accounting. This allows you to pay monthly instalments to HMRC based on the previous year’s VAT liability. After making nine monthly payments, each of 10% of the estimated liability, the VAT return, with a final balancing payment of the actual VAT due, has to be paid when the annual VAT return is submitted. The return has to be submitted two months after the end of the period rather than the normal one month.
If you think the VAT you owe is going to be significantly more or less than the estimated amount, you can write to HMRC and ask to have the level of the instalments changed, so that you don’t either overpay or end up with a big bill at the end of the year.
Late VAT payments
If you can’t pay on time, contact HMRC’s business payment support service and let them know you can’t pay. You should be able to arrange a payment schedule, and in so doing will avoid any penalties for late payments.
Practical VAT tip
Make sure you pay your VAT on time to avoid penalties and take advantage of the systems and good housekeeping practices available to make sure you have the funds available to pay HMRC at the end of the quarter.
