Covid-19 VAT deferment policy cost HMRC £14bn in its first month

HMRC Digital filing

The Government’s policy of allowing businesses to defer their VAT payments until next year has already cost HMRC £14bn in a single month.

HMRC actually paid out £897m more than it received in VAT in April 2020, compared with income of £13bn from the tax in April 2019.

This is due to HMRC continuing to repay businesses owed refunds, while deferring payment of VAT owed returns to HMRC. This is the first time on record that HRMC’s monthly income from VAT has been negative.

Sean Glancy, VAT Partner at accountancy firm UHY Hacker Young, said: “It’s astonishing that a tax could actually cost the Government money, but that’s exactly what happened with VAT in April as businesses all over the UK deferred payments until next year.”

The financial stress on businesses also means that there are questions over how much of this deferred VAT HMRC will be able to collect. There are temporary protections now in place to prevent businesses going insolvent but once these protections expire, there is expected to be a wave of businesses closing down without having the cash to pay their outstanding VAT.

The firm also says that the VAT deferment policy has left the Treasury open to fraud. As the VAT deferment policy had to be put in place extremely quickly, there are very few checks in place to prevent businesses from fraudulently claiming VAT repayments and disappearing.

Adds Sean Glancy: “The Government was put in an extremely difficult position, where it had to choose between leaving itself open to VAT fraud and letting thousands of businesses go to the wall.”

“It was forced to put the VAT deferment policy in place in a matter of days, meaning it was impossible to include adequate fraud prevention measures. Unfortunately, that is likely to cost the Treasury a great deal of money over the next year.”