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What is deferred VAT?

VAT-registered businesses can defer VAT on certain goods and assets. In this article, we look at various VAT deferral schemes that could help business cashflow.

VAT payable on buying business assets like equipment and vehicles can be a drain on cashflow. There can also be times when businesses struggle to pay what they owe HMRC on time.

Tradespeople could benefit from deferring VAT where an allowable scheme is available.

Deferred VAT is a way of adjusting the timing of VAT payments. This is usually for specific transactions, such as hire purchase contracts or importing goods.

Business owners should be aware that various Covid-related VAT deferral schemes have ended.

Deferred VAT on hire purchase contracts

Business equipment and vehicles can be costly additions to grow your business. That’s why many tradespeople choose to buy assets like these on a hire purchase (HP) contract.

An HP contract allows you to pay for the asset over an agreed period. This is typically between two and five years. At the end of the period your business will then own the asset.

This helps businesses to spread the cost of the asset evenly over the contract.

But hire purchase contracts require the full amount of the VAT to be paid at the outset. VAT can then be recovered in the normal way when you submit a quarterly VAT return.

This could cause a cashflow headache. The delay between paying VAT and recovering it in your VAT return can put pressure on finances.

To avoid cashflow issues, some finance providers offer a VAT deferral option. It allows you to defer paying VAT on your asset for three months.

You submit your usual VAT return and recover the VAT on the asset. But you don’t have to pay the full VAT amount to the finance company until your third monthly instalment.

Hire purchase contracts cost more overall than buying the asset outright but could be worth considering based on cashflow.

A row of white transit vans

VAT deferment if you import goods

If you regularly import business goods to the UK you can set up a VAT deferment account. This covers import VAT as well as customs duty and excise duties. It should make your paperwork easier and improve your cashflow.

You or your representative (such as the courier company) will then only have to make one monthly payment. It means you don’t have to pay VAT immediately each time an import arrives. Such accounts allow you to defer paying duties due on imported goods for a few extra weeks.

Another option is called postponed VAT accounting. This is where you declare import VAT and record the amount on the same VAT return.

This method avoids time gaps between paying VAT when the goods arrive and recovering it on a later VAT return.

If you can’t pay your VAT bill in full

HMRC payment plans are available for businesses unable to pay their VAT bill in full on time. Payments can be made in instalments.

Payment plans are being updated following the introduction of new late-payment charges in January 2023. From 31 December 2023, you can request a payment plan within 15 days of your VAT due payment date. If HMRC agrees, you won’t get a late payment penalty charge (so long as you stick to the agreed payment plan).

Another HMRC scheme that can defer your VAT payments is a Time to Pay arrangement. This is a flexible agreement for you to make affordable monthly payments.

With Time to Pay, you can adjust your monthly payments. Pay more if your income increases and less if it falls or your business expenses increase. You’ll have to pay interest on the outstanding amount until it has been repaid.

accounting hmrc vat deferment

Covid-19 VAT deferral schemes

You may have heard about VAT deferral schemes that supported businesses during the Covid-19 pandemic. Three VAT deferral schemes were introduced to help business cashflow during this difficult period:

  • Businesses were able to automatically defer VAT payments due between 20 March 2020 and 30 June 2020. These had to be paid in full by 31 March 2021
  • With the second wave of the pandemic, a VAT referral new payment scheme was announced. This was in September 2020. It was for businesses that had already deferred VAT payments and submitted VAT returns. It allowed these businesses to pay in smaller instalments between March 2021 and March 2022
  • When the third lockdown hit, a payment holiday on the new payment scheme was announced. This was in January 2021. All instalments had to be paid by January 2022

These VAT deferral schemes have now ended and businesses face penalty charges on outstanding amounts.

FAQs

What is deferred VAT?

VAT deferral schemes involve adjusting when businesses account for VAT. These usually help with cashflow.

How can I benefit from deferred VAT on a hire purchase contract?

Finance companies can allow businesses to defer paying VAT at the start of a contract by three months.

If I import goods can I defer VAT to help my cashflow?

Yes. A VAT deferment account or postponed VAT accounting could help smooth the process.

What help is available to defer VAT payments if my business is struggling to pay on time?

HMRC provides various payment plans if you can’t pay your VAT in full when it is due.

Are Covid-19 VAT deferral schemes still available?

No. Deferred VAT schemes to help businesses with cashflow challenges during the pandemic have ended.

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DISCLAIMER

This is information – not financial advice or recommendation. The content and materials featured or linked to on this blog are for your information and education only and are not intended to address your particular personal requirements. The information does not constitute financial advice or recommendation and should not be considered as such. Checkatrade website is not regulated by the Financial Conduct Authority (FCA), its authors are not financial advisors, and it is therefore not authorised to offer financial advice.

Always do your own research and seek independent financial advice when required. Any arrangement made between you and any third party named or linked to from the site is at your sole risk and responsibility. Checkatrade blog and its associated writers assume no liability for your actions.

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