VAT Holiday Extended for Small Firms Until 2022

The Chancellor of the Exchequer, Rishi Sunak, has outlined the UK government’s Winter Economy Plan, as part of its strategy to protect jobs and underpin British small businesses during the difficult winter months ahead.

More than half-a-million small firms chose to defer their VAT bills during 2020, giving them additional cash flow during the COVID-19 lockdown restrictions under the COVID-crisis support scheme. The government has since decided to assist the small business community further still by extending the holiday for VAT returns from July 2020 and January 2021 until January 2022.

VAT bills are one of the main costs that small companies have to worry about throughout the financial year. It’s not uncommon for these to put a strain on a firm’s working capital, which is why some businesses often seek a working capital facility that allows them to spread the cost of their tax bills over a period of months. This latest announcement from the Chancellor could be just as powerful as a working capital loan, as bills deferred from March 2020 and June 2020 will no longer need to be paid in one lump sum by 31st March 2021.

Those businesses affected will instead be able to opt-in to a new scheme, whereby their outstanding VAT liabilities for March 2020 and June 2020 can be paid over 11 monthly interest-free instalments. Mr Sunak also noted in his speech to the House of Commons that any business struggling to pay their VAT can also apply for more time to pay by liaising directly with HM Revenue and Customs (HMRC).

As consumer demands evolve in the COVID-19 pandemic, many businesses are reliant on using their cash flow to pivot and try new directions. This VAT holiday extension should give many entrepreneurs the breathing space they need to change course.

Another key part of the Chancellor’s Winter Economy Plan was the announcement of a new short-time working scheme, modelled on the successful German ‘kurzarbeit’ scheme. Mr Sunak’s new scheme pledged to protect and subsidise “viable” jobs by providing up to a third of normal salaries. The plan being to ensure those on reduced working hours can still receive a living wage.

The new Job Support Scheme will replace the furlough scheme, which is due to close on 31st October. Official statistics show that around 12% of the country’s workforce are still on full or partial furlough. It’s expected that the new scheme will cost the government around £300 million per month.

Eligible employees must be able to work at least a third (33%) of their normal contracted hours. Furthermore, these employees must also have been on a company’s PAYE payroll on or prior to 23rd September 2020. For every contracted hour an employee is unable to work due to COVID-19 restrictions, the government and the employer will pay one-third of the shortfall in pay.

There is a ceiling to how much the government will contribute each month, which is set at £697.92. The upshot is that eligible workers enrolled in the Job Support Scheme will be able to earn a minimum of 77% of their usual salary, in cases where the government’s monthly contribution does not need to be capped.

Like the VAT holiday, this scheme will also run well into 2021, with the scheme initially set to open for six months from 1st November 2020. It remains to be seen how much it will help out small firms over the challenging next few months.

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