Brexit: Preparing if the UK leaves the EU with no deal

The government has published the first 25 of a series of technical papers on how the UK will be affected by Brexit if on 29 March 2019 no deal with the EU has been reached. The “no deal” scenario is possible if the UK government and the EU cannot agree terms and the UK therefore becomes a third country at 11pm GMT on 29 March 2019 without a Withdrawal Agreement or a framework for a future relationship in place between the UK and the EU.

A no-deal Brexit could mean lorry queues building up at ports as the previously smooth import and export of goods in the Single Market ends, to be replaced by new customs checks. Goods which are meant to arrive ‘just in time’  or are perishable, could be subject to delay, affecting stocks, production and ultimately sales.

Below is a summary of the main VAT issues. More detail on trade, import and export procedures can be found here.

VAT before 29 March 2019

Under current VAT rules:

  • VAT is charged on most goods and services sold within the UK and the EU.
  • VAT is payable by businesses when they bring goods into the UK. There are different rules depending on whether the goods come from an EU or non-EU country.
  • goods that are exported by UK businesses to non-EU countries and EU businesses are zero-rated, meaning that UK VAT is not charged at the point of sale.
  • goods that are exported by UK businesses to EU consumers have either UK or EU VAT charged, subject to distance selling thresholds.
  • for services the ‘place of supply’ rules determine the country in which you need to charge and account for VAT.

VAT after 29 March 2019 if there’s no deal

The UK will continue to have a VAT system after it leaves the EU. The VAT rules relating to UK domestic transactions will continue to apply to businesses as they do now.

If the UK leaves the EU on 29 March 2019 without a deal, the government’s stated aim will be to keep VAT procedures as close as possible to what they are now.  However, if the UK leaves the EU with no agreement, then there will be some specific changes to the VAT rules and procedures that apply to transactions between the UK and EU member states.

UK businesses importing goods from the EU

In a no deal scenario the current rules for imports from non-EU countries will also apply to imports from the EU. Customs declarations would be needed when goods enter the UK (an import declaration). This means customs duty may also become due on imports from the EU customs checks may be carried out and any customs duties must be paid –  import VAT would be payable on such goods.

If the UK leaves the EU without an agreement, the government will introduce ‘postponed accounting’ for import VAT on goods brought into the UK. This means that UK VAT registered businesses importing goods to the UK will be able to account for import VAT on their VAT return, rather than paying import VAT on or soon after the time that the goods arrive at the UK border. This will apply both to imports from the EU and also non-EU countries. More detail on these processes can be found in the ‘Trading with the EU if there’s no Brexit deal’ technical notice. More guidance setting out further detail on accounting and record keeping requirements will be issued in due course.

Goods entering the UK as parcels sent by overseas businesses

VAT will become due on goods sent as parcels from overseas busniesses. If the UK leaves the EU without an agreement then Low Value Consignment Relief (LVCR) will no longer apply to any parcels arriving in the UK.  For parcels valued up to and including £135, the Government states that a technology-based solution will allow VAT to be collected from the overseas business selling the goods into the UK. Overseas businesses will charge VAT at the point of purchase and will be expected to register with an HM Revenue & Customs (HMRC) digital service and account for VAT due.

For goods worth more than £135 sent as parcels VAT will continue to be collected from UK recipients in line with current procedures for parcels from non-EU countries.

Exporting goods to the EU

UK businesses would need to plan for customs and VAT processes, which will be checked at the EU border. So they should check with the EU or relevant Member State the rules and processes which need to apply to their goods.

Exporting goods to EU businesses –VAT registered UK businesses will continue to be able to zero-rate sales of goods to EU businesses, but will not be required to complete EC sales lists. UK businesses exporting goods to EU businesses will need to retain evidence to prove that goods have left the UK, to support the zero-rating of the supply.  The required evidence will be similar to that currently required for exports to non-EU countries with any differences to be communicated in due course.

Import VAT at the rate due on the Member State and customs duties will be due when the goods arrive into the EU. UK businesses nwoudl need to check the relevant import VAT rules in the EU Member State concerned.

Exporting goods to EU consumers -if the UK leaves the EU without an agreement, the VAT distance selling arrangements will no longer apply to UK businesses and UK businesses will be able to zero rate sales of goods to EU consumers.

Current EU rules would mean that EU member states will treat goods entering the EU from the UK in the same way as goods entering from other non-EU countries, with associated import VAT and customs duties becoming due when the goods arrive into the EU.

Supplying services into the EU from the UK

If the UK leaves the EU without an agreement, the main VAT ‘place of supply’ rules (which determine the country in which you need to charge and account for VAT) will continue to apply in broadly the same way that they do now, with areas of potential change  flagged below.

Digital services to non-business customers – the ‘place of supply’ will continue to be where the customer resides. VAT on services will be due in the EU Member State within which your customer is a resident.

Insurance and financial services – if the UK leaves the EU without an agreement, input VAT deduction rules for financial services supplied to the EU may be changed. 

Tour Operators -businesses that buy and sell on certain travel services that take place in the EU use the Tour Operators Margin Scheme. HMRC state that they will continue to work with businesses to minimise any impact.

VAT Mini One Stop Shop (MOSS)

MOSS is an online service that allows EU businesses that sell digital services to consumers in other EU member states to report and pay VAT via a single return and payment in their home Member State. Non-EU businesses can also use the system by registering in an EU Member State.

If the UK leaves the EU with no agreement, businesses will no longer be able to use the UK’s Mini One Stop Shop (MOSS) portal to report and pay VAT on sales of digital services to consumers in the EU.

Businesses that want to continue to use the MOSS system will need to register for the VAT MOSS non-Union scheme in an EU Member State. This can only be done after the date the UK leaves the EU. The non-union MOSS scheme requires businesses to register by the 10th day of the month following a sale. You will need to register by 10 April 2019 if you make a sale from the 29 to 31 March 2019, and by 10 May 2019 if you make a sale in April 2019.

Alternatively, a business can register for VAT locally in each EU Member State where sales are made.

EU VAT refund system

If the UK leaves the EU without an agreement, then UK businesses will continue to be able to claim refunds of VAT from EU member states but in future they will need to use the existing processes for non-EU businesses.

EU VAT Registration Number Validation – accessed via the EU Commission’s website

If the UK leaves the EU without an agreement, UK businesses will be able to continue to use the EU VAT number validation service to check the validity of EU business VAT registration numbers.  UK VAT registration numbers will no longer be part of this service.  HMRC is developing a service so that UK VAT numbers can continue to be validated.

Businesses in Northern Ireland importing and exporting to Ireland

There is no detail on trade between Northern Irleand and Ireland except that the paper states that in a no deal scenario, the UK would ‘stand ready to engage constructively to meet our commitments and act in the best interests of the people of Northern Ireland’.

More information from HMRC on Making Tax Digital

On 13 July 2018 HMRC published further information on Making Tax Digital (MTD) for businesses and agents in the run up to the start of the mandatory MTD VAT service from 1 April 2019.

From April 2019 all VAT registered businesses (including charities) with a taxable turnover above the VAT threshold (£85,000) are required to keep their VAT business records digitally and send their VAT returns using Making Tax Digital (MTD) compatible software. Businesses with a taxable turnover below the VAT threshold will not have to operate MTD, but can still choose to do so voluntarily.  A reminder of key principles behind MTD for VAT can be found in our previous article here.

The information includes:

  • A new HMRC VAT Notice. The VAT Notice 700/22  gives guidance on the digital record keeping and return requirements of MTD for VAT including:
    • Who needs to follow the MTD rules and from when;
    • The digital records businesses must keep, and a series of HMRC directions that relax these requirements in certain circumstances (such as where a mixed rate supply is made, where a third party agent makes or receives supplies on behalf of a business, and where a business uses a special VAT scheme such as a retail scheme or the Flat Rate Scheme);
    • How businesses must use software to keep digital records and file their returns from those digital records, including information on when programs do and do not need to be digitally linked in situations where a combination of software programs is used.
    • A number of illustrated examples to show customers how to ensure their specific set-up will be compliant with the regulations from April 2019
  • A page on GOV.UK providing a list of software developers  HMRC is currently working with that have already demonstrated a prototype of their product ready to start testing with businesses and/or agents. Over 35 of these have said they’ll have software ready during the first phase of the VAT pilot in which HMRC is testing the service with small numbers of invited businesses and agents. The pilot will be opened up to allow more businesses and agents to join later this year.
  • A communications pack to provide stakeholders with information to support businesses and agents to prepare for MTD.

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HMRC consult on new way for building traders to account for VAT

Under rules to come in on 1 October 2019 builders, contractors and other trades associated with the building industry will have to get to grips with a new way of accounting for VAT.

The measure is designed to combat missing trader VAT fraud in construction sector labour supply chains which HMRC says presents a significant risk to the Exchequer.

Following an initial consultation in March 2017, HMRC has now published draft legislation, a draft explanatory memorandum and a draft tax information and impact note on the so-called “Reverse Charge (RC) for construction services”. HMRC has asked for comments before 20 July 2018. It is intended a final version of the draft order and guidance will then be published before October 2018.

Under the new rules, supplies of standard or reduced rated building services between VAT-registered businesses in the supply chain will not be invoiced in the normal way. Under the RC a main contractor would account for the VAT on the services of any sub-contractor and the supplier does not invoice for VAT. The customer (main contractor) accounts for VAT on the net value of the supplier’s invoice and at the same time deducts that VAT – leaving a nil net tax position.

The RC only applies to other construction businesses which then use them to make a further supply of building services, and not to end users eg private individuals, retailers, and landlords. There are no de minimis limits, but the RC will not apply to associated businesses.

Type of work affected

Despite the rather misleading reference to ’construction‘ the RC will in fact apply much more widely to services in the building trade, including but not limited to, construction, alteration, repairs, demolition, installation of heat, light, water and power systems, drainage, painting and decorating, erection of scaffolding, civil engineering works and associated site clearance, excavation, foundation works. The definitions in the draft legislation have been lifted directly from the CIS legislation.

Excluded works

Some works will not be covered and invoicing for these will not change. These include

  • professional services of architects or surveyors, or of consultants in building, engineering, interior or exterior decoration or in the laying-out of landscape
  • drilling for, or extraction of, oil, natural gas or minerals, and tunnelling or boring, or construction of underground works, for this purpose
  • manufacture of building or engineering components or equipment, materials, plant or machinery, or delivery of any of these things to site
  • manufacture of components for systems of heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection, or delivery of any of these things to site
  • signwriting and erecting, installing and repairing signboards and advertisements
  • the installation of seating, blinds and shutters or the installation of security.

Questions and preparation

In addition to the technical consultation HMRC has been engaging with trade bodies, and discussions are ongoing.

One of the main concerns is the burden for traders of identifying customers who are liable for the RC – ie checking VAT registration numbers and obtaining evidence that a customer is an ’end user‘ or not, so that VAT, if due, is invoiced correctly. It seems likely that certification will be required, but none of this is covered in the consultation. There are also questions over the scope of the services covered, and how the supply of ’white goods‘ (where VAT deduction is blocked in most cases), will be dealt with under the RC mechanism.

The idea of having draft legislation and guidance by October 2018 is to allow businesses 12 months in which to make the necessary changes to systems, prior to implementation on 1 October 2019. But this is a period in which businesses will also be coping with or preparing for Brexit and Making Tax Digital. Traders used to including VAT in their cashflow projections will also need to adjust.

Affected businesses will need plans in place to ensure that as suppliers they do not charge VAT incorrectly, or as recipients they apply the RC correctly. Output VAT wrongly applied on an invoice can be collected by HMRC, but will not be recoverable by the recipient, and failure to operate the RC could lead to error penalties.

The Wakefield College case and ‘non-business’ for VAT

The Court of appeal has released its judgment in the case of Wakefield College v HMRC [2018] EWCA Civ 952.

This case has implications for all charities because it is about the VAT relief (a zero rate) applicable to the construction of new buildings for charities. The relief applies where a building is used for non-business purposes – “relevant charitable purpose”. Where any business use would be exempt, (for example education provided by charities), the charity will prefer its activities to be regarded as non-business so that it is not charged VAT which it cannot claim.

The Court of Appeal decision in Longridge on the Thames [2016] EWCA Civ 930, in September 2016 appeared to establish that there is limited scope for ‘non-business’ charitable activity for the purposes of the ‘relevant charitable purpose’ test.  Longbridge claimed the key test was whether the charity’s ‘predominant concern’ was the making of supplies for a consideration. It argued that its policy of subsidised pricing and use of volunteers showed that it was predominantly concerned with providing access to sporting activity and not with ‘making supplies for a consideration’. But Longridge lost in the Court of Appeal – the court thought that neither predominant concern nor the quantum of the charges were relevant. At that time, however, the Wakefield case was still running.

In Wakefield HMRC denied VAT relief for the new college building on the basis that more than 5% of the use would be ‘business’.  The issue was whether the provision of further education courses to students living locally who paid a fixed, but publicly subsidised fee, amounted to the carrying on of a business activity.

The College argued the subsidised courses were not “business” based on the CJEU decision of Finland, in which it was decided that means-tested payments, made by a minority of service users for legal advice, was not consideration because it relied on determining the means of the payer not the value of the service, and that was not a clear enough ‘link’ for the payment to be made ‘for’ the services.  This line of argument was later followed in the CJEU in Gemeente Borsele, where a municipal body charged parents for school transport, but only those travelling over a certain distance, and only to the extent families could pay, meaning it received only 3% of the actual cost of the service. The College argued that it, too, only charged a small percentage, and had kept fees low because of the economic circumstances of the local residents. It thus argued that despite charges being fixed for all qualifying applicants, this was a form of means testing, as in Finland and Gemeente Borsele, and it was therefore not receiving ‘consideration’ for these courses and thus not in ‘business’ to that extent.

Decision

The Court of Appeal found that the College was carrying on an economic activity and thus zero rating could not apply. Briefly this was because its activities were not comparable to those in Finland and Bosele. Its sole activity is the provision of educational courses, whereas the transport in Borsele and the legal services in Finland were very much ancillary to their principal activities as public bodies. The provision of courses to students paying subsidised fees was a significant, albeit minority, part of the College’s total operations and the fees paid by such students were significant in amount, both in value and in relation to the cost of providing the relevant courses. Furthermore, the fees paid by the students were calculated by reference to the cost of providing the courses, and not to the means of the individual students.

Why it matters

HMRC suggested that about 50 other cases, involving approximately £120m of VAT, would be affected by this decision. The Court made some interesting comments, derived from reading the French version of the Finland and Borsele cases, and said whether there is a supply for consideration and whether that supply constitutes an economic activity are two separate questions. A supply ‘for consideration’ is  necessary, but is not sufficient in itself for an actvity to be an ‘economic activity’. The first condition requires  the payment to be made under a legal relationship with reciprocal performance between the supplier and the recipient, i.e. the ‘direct link’. The economic activity condition means also showing that the supply is made ‘for the purpose of ‘obtaining an income. But ultimately the Court decided that here the “direct link” test was met anyway, because the fees were not means-tested.

Thus it seems likely that the position after Longridge remains, i.e. that the only use that is not to be regarded as ‘business’ is in cases where there is no ‘remuneration’ (for which read payment or ‘consideration’). Unfortunately HMRC may now be likely to argue that, even in very small operations where below-cost payment is received, (such as in the cases of St Pauls and Yarborough nurseries) construction services may not qualify for relief.

 

 

Making Tax Digital for VAT – under a year away

We are less than a year (or only 4 VAT returns to go) before the ‘Making Tax Digital’ deadline of 1 April 2019.

The first stage of Making Tax Digital (MTD) will apply to all VAT registered businesses who are over the VAT turnover threshold (£85,000 until March 2020) from the first VAT return which starts after 1 April 2019. The regulations passed into law in March 2018. HMRC have published an Explanatory Note, a draft VAT Notice and a draft Addendum document outlining ‘user journeys’, which uses diagrams to explain the digital links required between records. These can be accessed here but are subject to future amendment. A detailed chart which compares the current rules with those expected under MTD for VAT can be found on the CIOT website here and we reccommend reading this.

The regulations provide that VAT registered businesses (including charities) must keep an electronic account of information specified in the amended regulations, and must use an approved form of software to prepare and render VAT returns. Under MTD, businesses must keep certain mandatory records in a digital format within ‘functional compatible software’, able to interface with HMRC’s systems, and thus send and receive information to and from HMRC. Taxpayers using multiple accounting software packages to record or calculate information that drives VAT return data must digitally link them to be MTD compliant.

Most of our clients use software to keep their accounting records. However, we are aware that very few of them actually use that software to calculate and declare VAT returns, due to the complexities of partial exemption and business/non-business adjustments. If you are using spreadsheets for that you need to start thinking about how any adjustments calculated via spreadsheet are going to get back into a digital format for submission to HMRC under MTD. At the very least we recommend contacting your software supplier to check whether they will be providing any support, and looking at the ‘user journey’ Addendum document from HMRC. You may need to upgrade to use ‘cloud’ based accounting software.

The main and important issue is that information transfer between internal interfaces and with HMRC must be ‘digital’ (and via third party software) where the records are part of the Making Tax Digital for Business (MTDfB) journey, but adjustments (such as partial exemption) will still apparently be able to be calculated separately and manually via spreadsheet– i.e. this step is not part of the ‘MTDfB journey’. It is noted that the information to be recorded also includes a requirement to separately identify the value of income into standard rated, reduced rated, zero-rated, exempt or outside the scope outputs. HMRC plans a “soft landing” in the first year to allow organisations to transition to the new rules.

The draft regulations provide for exemptions from the digital requirements based on turnover, inability to use electronic systems for religious or practical reasons, and for businesses subject to insolvency. Exempted businesses may opt for the obligations in the regulations to apply to them if they so wish. The amended regulations also provide rules for how business records should be preserved.

Pilot scheme

Businesses can sign up to take part in a MTD pilot exercise from 1 April 2018. The benefit of taking part in the pilot will be being ahead of the game, getting access to support, being kept up to date on how the system is developing, an opportunity to influence the look and feel of the final version, and feedback on how you are getting on with the submissions. There is more information on the pilot here, but please contact us if you need more help.

 

The VAT registration threshold – too high?

As was expected in the Spring Statement the Chancellor announced a call for evidence into the effect of the current VAT registration threshold on growth, The Government believes that the current ‘cliff edge‘ VAT registration threshold may act as a disincentive to growth of small businesses and to consequent improvements in productivity. This was noted by the Office of Tax Simplification in its review of VAT published last year, and which recommended that the Government examine the current approach to the VAT threshold.

Business views on the threshold are divided. Some argue that having a high threshold has the benefit of keeping the majority of small businesses out of VAT altogether, avoiding all the administrative requirements that accompany the tax. Others consider that a lower threshold would reduce distortions of competition.

The Government’s call for evidence is split into three sections:

  • the first explores in more detail how the threshold might currently affect business growth
  • the second looks in more detail at the burdens created by the VAT regime at the point of registration, and why businesses might manage their turnover to avoid registering
  • the third considers possible policy solutions, based on international and domestic examples.

We recommend that any small enterprises, including charities, which are currently trading below or near the threshold explore the paper and the questions it asks as this could mark a fundamental change to the way VAT operates in the UK.

Membership Subscriptions and VAT – the Harley Davidson case

Membership subscriptions are always an area of contention for charities. Some charities benefit from a VAT Extra Statutory Concession for non-profit membership bodies under which HMRC allow subscriptions to be apportioned to reflect the underlying VAT treatment of the specific benefits. This is useful where the benefits include printed material which is generically zero rated, and which allows for a reduction in VAT charged on the subscription. Alternatively where the benefits would otherwise be exempt, it increases VAT recovery on costs.

HMRC have recently argued that this concession only applies to formal membership bodies whose members are able to vote (e.g. at AGMs) and cannot apply to ‘friends’ and ‘patron’ schemes. In addition, HMRC have also tended in recent years to argue that ‘membership’ is a single supply which is essentially standard rated, unless the predominant benefit is printed matter. The 2015 Serpentine Gallery tribunal decision supported HMRC’s view; the tribunal asserting that supporters were not members, and that the ‘basket of supplies’ they received was a single (or ‘composite’) standard rated supply of ‘association’ with the Gallery.

But with the Harley Davidson tribunal case there is now some more encouraging news for charities who operate membership schemes without that level of member involvement, and whose use of the ESC might therefore have been challenged. Harley Davidson won on the basis that the package of benefits arising from payment of its membership fee could be treated as a multiple (or ‘mixed’) supply where every element is afforded its own VAT treatment. The case considered whether under VAT law, not concession, their membership subscription was apportionable to reflect different liabilities such as printed magazines. The tribunal found as a fact that it was apportionable.

This is an important case, and we await news of whether HMRC will appeal. It is possible that they will not, hoping that this will mean that they can argue Harley was decided on its facts. Many charities operating membership schemes may however be closer to the Harley fact pattern than to Serpentine. Unless HMRC appeals successfully, it may be easier for charities to argue that they need not rely on the ESC (and thus do not need voting members) as the supply can be apportioned as a matter of VAT law. We await further developments, but in the meantime please get in touch if you wish to discuss your circumstances.

VAT in the Autumn Budget

VAT – related measures in the 2017 Autumn Budget

VAT registration threshold – Not the expected drop in the registration threshold, but the Government has said it will consult on the ‘design’ of the threshold in response to the Office of Tax Simplification (OTS) report on the simplification of VAT.  In the meantime, the threshold will be maintained at the current level of £85,000 for two years from April 2018. Therefore, the position will continue as follows:

  • the taxable turnover threshold that determines whether a person must be registered for VAT will remain at £85,000
  • the taxable turnover threshold that determines whether a person may apply for deregistration will remain at £83,000
  • the registration and deregistration threshold for relevant acquisitions from other EU Member States will also remain at £85,000

Comment – This will come as a relief for many in the small business sector who would have been facing additional administrative costs as well as potentially having to update systems for the Making Tax Digital reforms. However, it remains the case that the Government is looking to reform registration, so this should be regarded as a temporary pause for thought.

Import VAT after Brexit – Businesses currently benefit from postponed accounting for acquisition VAT when they buy goods from the EU. This means no business has to pay VAT upfront before being able to deduct it on returns, which is an important cashflow advantage. Once the UK leaves the EU all goods bought from the EU will be liable to import VAT, which is currently payable on entry. The Government announced it would take this into account when considering potential changes following EU exit and will look at options to mitigate any cash flow impacts

Comment – this is very important and potentially welcome news for importers as the current system could create very serious cashflow issues for many businesses.

Review of VAT rates and exemptions – the Chancellor responded to the OTS VAT review proposals and noted that the Government’s ability to amend the scope of the various rates and exemptions is limited to some extent by EU law at present (while the UK remains in the EU) but agrees that there is merit in a review of the current system of VAT rates and reliefs in the longer term, and HMRC and HM Treasury officials will continue to engage with the OTS on this subject.

Anti-avoidance measures

VAT fraud in labour provision in the construction sector – Following a consultation in March 2017 into options for tackling fraud in construction labour supply chains, the government will introduce a VAT domestic reverse charge to prevent VAT losses. This will shift responsibility for paying VAT on construction services along the supply chain to remove the opportunity for it to be stolen. Changes will have effect on and after 1 October 2019. The long lead-time reflects responses to the consultation and the government’s commitment to give businesses adequate time to prepare for the change. The reverse charge will not apply to zero-rated services, nor supplies to the ‘final customer’.

Commentthis is a significant change for businesses commissioning and carrying out building work. Depending on which party in the supply chain is responsible for accounting for the tax this may be complex where zero rate or reduced rate supplies apply.  As part of the consultation HMRC were asked to consider very carefully the impact where VAT is charged at multiple rates such as in residential and charitable buildings. The definition of final customer will be the key.

Online VAT fraud

The Government announced a package of measure designed to tackle online VAT fraud which passes responsibility for monitoring to online trading platforms.

Extending HMRC powers to UK businesses – The government will legislate in Finance Bill 2017-18 to extend HMRC’s powers to hold online marketplaces jointly and severally liable (JSL) for the unpaid VAT of sellers on their platforms to include all UK traders. This extension is to help tackle the UK hidden economy and eliminate the risk of overseas traders establishing a UK shell company simply to escape the existing JSL regime. This will come into force on Royal Assent in the spring.

Extending powers on overseas businesses – The government will legislate in Finance Bill 2017-18 to extend HMRC’s powers to hold online marketplaces JSL for any VAT that a non-UK business selling goods on their platforms fails to account for, where the business was not registered for VAT in the UK and that online marketplace knew or should have known that the business should be registered for VAT in the UK. This will come into force on Royal Assent in the spring.

VAT number display – The government will legislate in Finance Bill 2017-18 to require online marketplaces to ensure that VAT numbers displayed for businesses operating on their website are valid. They will also be required to display a valid VAT number when they are provided with one by a business operating on their platform. This will come into force on Royal Assent in the spring.

Split payments – To reduce online VAT fraud and improve how VAT is collected, the government is looking at a split payment model. This is where the VAT due on a supply is paid direct to the tax authority by the customer. Following the call for evidence launched at Spring Budget 2017, the government will publish a response in December.

Encouraging compliance by users of digital platforms – The government will publish a call for evidence in spring 2018 to explore what more digital platforms can do to prevent non-compliance among their users.

Penalties

Late Submission Penalties and Late Payment Interest – The government will reform the penalty system for late or missing tax returns, adopting a new points-based approach. It will also consult on whether to simplify and harmonise penalties and interest due on late payments and repayments across different taxes. Final decisions on both measures will be taken following this latter consultation.

Other

Accident Rescue Charities Grant Scheme – A grant will be provided to help accident rescue charities meet the cost of normally irrecoverable VAT.

Access to VAT refunds for Combined Authorities – legislation will be amended to ensure UK Combined Authorities and certain fire services in England and Wales will be eligible for refunds of VAT they incur on costs. At present the Scottish Police and Fire Services are not eligible. Through Finance Bill 2017-18, legislation will be amended to ensure that Scottish Police and Fire Services will be eligible for VAT refunds.

VAT and vouchers – The government will consult on plans to legislate in Finance Bill 2018-19 to ensure that when customers pay with vouchers, businesses account for the same amount of VAT as when other means of payment are used, aligning the UK with similar changes being made across the rest of the EU.

VAT and Air Passenger Duty in Northern Ireland – Early in 2018, the government will publish a call for evidence which will consider the impact of VAT and Air Passenger Duty on tourism in Northern Ireland, to report at Budget 2018.

The VAT registration limit – up or down?

Since the publication of the Office of Tax Simplification’s report earlier this month there has been a lot of speculation as to what the Chancellor might do about the VAT registration threshold in this week’s budget.

The suggestion has been that the threshold could be dropped to around the higher tax rate limit of c£43,000, or even to the national average wage, i.e. £26,000 a year, but at the moment we don’t know for certain if the government will implement this, or when it could happen. The average threshold in Europe is around £20k. The idea of lowering the threshold, especially to the lower of those two options, has been met with a lot of anger in the small business community.

What are the issues?

Well, there is a lot of evidence that the current £85k limit is a barrier to growth. This is because the limit causes a ‘cliff edge’ effect where a small business approaching the limit needs a lot more turnover to compensate for suddenly having to add 20% to all its income. So many businesses decide to ensure they stay just short of the threshold by various means, for example by closing for a month each year. That causes ‘bunching’ of business around the threshold and prevents business expansion that might lead to job creation.  Plus, some businesses split themselves artificially into separate operations simply to avoid the limit (“disaggregation”) – with a lower limit there will be much less incentive to do this.

Who might be affected?

On the other hand, lowering the limit substantially would affect hundreds of thousands of self-employed small business owners such as plumbers, gardeners, decorators and similar, who are not planning any whizzy entrepreneurial growth but who are just making a living outside of traditional employment. These businesses already have limited income and will be affected by having to add 20% to their charges – and will have very few costs to offset as input tax. Their customers will be members of the public with no ability to deduct the VAT.

There will be a number of hurdles: –

  • The UK has had a high threshold for a long time and HMRC has not to date had to deal with thousands of small businesses;
  • HMRC guidance has been criticised in the OTS report – it will need to be helpful to a lot of businesses new to VAT;
  • If the lower threshold also brings businesses into Making Tax Digital that will be a big change on top of the requirement to register;
  • The biggest impact will be on businesses which deal direct with the public;
  • For small charities the effect could be very difficult unless the Government also raises the de minimis limit for exempt  activities;
  • Prices will go up, with a possible effect on sales – some businesses may fold.

The OTS suggested some ways in which these effects could be lessened. There could be for example a lower rate for labour intensive service businesses or a change to the VAT Flat Rates, or a tapering requirement to register (though that might make things more complex, not simpler).

We can only guess what is coming. But the in the context of recent press reports on how far richer people seem to be engaged in various off-shore tax planning schemes to avoid paying VAT, the political backlash might not be “Paradise” for the Chancellor.

 

VAT simplification – a tax that is showing its age

On 7 November 2017 the Office of Tax Simplification (OTS) laid in Parliament and published its first report on VAT setting out a range of proposals for simplifying the tax. What was meant to be a simple tax has become highly complex and the OTS report says it has not kept pace with changes in society.

The report contains 23 recommendations for simplifying the tax. Its lead recommendation on the future level and design of the VAT threshold has prompted debate. By enabling many small businesses to stay out of the VAT system the high threshold is a form of simplification, but it costs the UK around £2bn per annum, and evidence suggests that many growing businesses are discouraged from expanding beyond this point. The report looks at options for reducing the current ‘cliff edge’ effect resulting in a ‘bunching’ of businesses just before the VAT threshold, and an equally large drop off in the number of businesses with turnovers just above the threshold.

The 8 core recommendations are:

  • the government should examine the current approach to the level and design of the VAT registration threshold, with a view to setting out a future direction of travel for the threshold, including consideration of the potential benefits of a smoothing mechanism
  • HMRC should maintain a programme for further improving the clarity of its guidance and its responsiveness to requests for rulings in areas of uncertainty
  • HMRC should consider ways of reducing the uncertainty and administrative costs for business relating to potential penalties when inaccuracies are voluntarily disclosed
  • HM Treasury and HMRC should undertake a comprehensive review of the reduced rate, zero-rate and exemption schedules, working with the support of the OTS
  • The government should consider increasing the partial exemption de minimis limits in line with inflation, and explore alternative ways of removing the need for businesses incurring insignificant amounts of input tax to carry out partial exemption calculations
  • HMRC should consider further ways to simplify partial exemption calculations and to improve the process of making and agreeing special method applications
  • the government should consider whether capital goods scheme categories other than for land and property are needed, and review the land and property threshold
  • HMRC should review the current requirements for record keeping and the audit trail for options to tax, and the extent to which this might be handled on-line.