Many businesses have been affected adversely when it comes to sales and cashflow as a result of the Coronavirus economy shutdown. Our Government has provided monetary support in numerous ways including grants and readily accessible loans which should help fulfil some financial obligations such as paying staff salaries and supplier invoices where possible, as well as allowing for delayed VAT and Tax payments. However, if you’re racking up debts then it is important to bear in mind the rules of Debt Relief as outlined in our blog below.
Debt management
There are many ways you can manage your debt if you’ve suffered financial loss as a result of the Coronavirus outbreak.
- Are you eligible for any of the Government grants or funding lines that have been made available such as the Job Retention Scheme, Business Interruption Loan Scheme, Local Council Business Rates Grants, Small Business Bounce Back Loan Scheme and other options? The loan repayments have been set to be deferrable for the first year without accumulating interest and the interest rates have been set favorably or at 0%.
- Have you utilised the opportunity to defer VAT and tax payments?
- For any commercial rent payments, landlords are obliged to discuss options to support tenants and emergency measures part of the Coronavirus Bill will mean no business will be forced out of their premises if they miss a payment until the end of June 2020.
- Banks have offered mortgage payment holidays if you’ve been affected by Coronavirus which may be worth considering if you have Buy-to-Let or holiday rental properties.
- Speak to your suppliers about negotiating invoice payment delays or structured repayments.
VAT Bad Debt Relief
Since 2002, the current provisions of bad debt relief rules, state that relief may be claimed after six months have elapsed from the due date for payment of the relevant supply (or six months after the tax point, if this is later).
- For a claim to be made, the debt must have been “written off”. For VAT purposes only, this means that it must have been recorded in a “refunds for bad debts account”. You must keep a written record for HMRC, of the amount unpaid and the VAT element of that invoice.
- After recording the information, you then calculate the VAT element of the outstanding debt and claim this on the VAT return, by including it in box 4 as if it were input tax (although it is not input tax, nor is it negative output tax; it is in fact a claim for relief). It therefore doesn’t conform to normal tax point rules, meaning that bad debt relief does not have a tax point; the claim is made by the act of submitting the VAT return. Thus, a claim can be made if the six months have elapsed by the date of submission of the VAT return, even if they had not elapsed by the end of the VAT period to which the return relates.
- A claim does not negate the sale nor create a purchase; no adjustment should therefore be made to either box 6 or box 7 of the VAT return (unless the sum claimed, when added to input tax, takes box 4 to a level exceeding 20% of box 7, in which case box 7 should be artificially inflated to a sum sufficient to justify the box 4 figure).
- If all or part of the debt is subsequently recovered, the VAT proportion of the amount received must be repaid to HMRC, by way of an entry in the output tax of the VAT return covering the date of receipt, again with no entry in box 6.
- No claim may be made more than four years and six months after the due date for payment (or invoice date if later) of the supply giving rise to the debt.
Aged Creditor Provisions
- The bad debt relief rules contain a “sting in the tail” for slow payers, (and there will no doubt be more slow payers than usual until the economy fully recovers): When the current bad debt relief rules came in, making the process far easier than it had been before, to ensure that HMRC did not end up losing out except in cases of true bad debts, an obligation was introduced for all debtors to repay input tax on any supply for which they had not paid, once the same six months had elapsed. This provision remains hidden in the official guidance on bad debt relief (rather than being seen as an entirely separate provision as arguably it should be, since it can affect those unconcerned by bad debts) and is often unknown to, or neglected by, affected debtors.
- It is advisable for all businesses not on cash accounting, to keep a record of outstanding creditors, with a view to ensuring that input tax on these is repaid at the appropriate time. The repayment is due on the VAT return for the period during which the six months elapsed.
Can you avoid delaying payments?
If you’re able to pay your VAT and Tax bills as well as your suppliers on time without any Government backed bank loan assistance or other deferral mechanism offered under COVID-19, then your business will be very well placed to cope with the economic uncertainty that will follow the lockdown. Those who have had to take on some form of debt should seek to minimise any further deferral or accumulation of debt as this will only hinder the businesses recovery and future prospects.
At LWA, our team have been supporting clients through the challenges and opportunities that Coronavirus has brought about. If you need support on maximising the funding opportunities to help your business get through these financially difficult times, or if you have any queries on managing debt and whether bad debt relief could benefit your cashflow, please contact one of our friendly team on 0161 905 1801 in Manchester, or on 01925 830 830 in Warrington.