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.