Autumn Statement – VAT

The following VAT meaures were announced in the Autumn Statement

VAT Flat Rate Scheme – The government will introduce a new 16.5% rate from 1 April 2017 for businesses with limited costs, such as many labour-only businesses to prevent perceived abuse of the scheme. Guidance in Notice 733 which has the force of law, published today, will introduce anti-forestalling provisions.

From 1 April 2017, FRS businesses will have to determine whether they meet the definition of a ‘limited cost trader’.  A limited cost trader will be defined as one whose VAT inclusive expenditure on goods is either:

  • less than 2% of their VAT inclusive turnover in a prescribed accounting period
  • greater than 2% of their VAT inclusive turnover but less than £1000 per annum

if the prescribed accounting period is one year (if it is not one year, the figure is the relevant proportion of £1000).

Goods, for the purposes of this measure, must be used exclusively for the purpose of the business but exclude the following items:

  • capital expenditure
  • food or drink for consumption by the flat rate business or its employees
  • vehicles, vehicle parts and fuel (except where the business is one that carries out transport services – for example a taxi business – and uses its own or a leased vehicle to carry out those services)

These exclusions are designed to prevent traders buying either low value everyday items or one-off purchases in order to inflate their costs beyond 2%.

Anti-forestalling provisions in the Flat Rate Scheme Notice 733 was provided on 23 November 2016 and is designed to prevent any business defined as a limited cost trader from continuing to use a lower flat rate beyond 1 April 2017. Draft secondary legislation will be published on 5 December 2016 and businesses will have 8 weeks to comment. HMRC will introduce an online tool that will help determine whether businesses should use the new rate.

Unfortunately as well as tackling the abuse, this measure will affect many legitimate small businesses who have low spend on goods, and mean that the benefits of the FRS will be reduced.

Tackling exploitation of the VAT relief on adapted cars for wheelchair users – The government will clarify the application of the VAT zero-rating for adapted motor vehicles to prevent stop abuse of this legislation, while continuing to provide help for disabled wheelchair users.

VAT grouping  – the government is to consult on the provisions relating to VAT grouping.

Retail Export Scheme – the government is to provide funding with a view to digitising the scheme fully the to reduce the administrative burden to travellers.

Tax simplification –the government has asked the Office of Tax Simplifcatrion to carry out reviews on aspects of the VAT system.

Other measures already announced

Strengthening tax avoidance sanctions and deterrents – as signalled at Budget 2016 the government will introduce a new penalty for any person who has’ enabled’ another person or business to use a tax avoidance arrangement that is later defeated by HMRC. This new regime will reflect an extensive consultation and input from stakeholders and details will be published in draft legislation shortly. The government will also remove the defence of having relied on non-independent advice as taking ‘reasonable care’ when considering penalties for any person or business that uses such arrangements.

Implementation of the Fulfilment House Due Diligence Scheme – as announced at Budget 2016, the government will legislate in Finance Bill 2017 to introduce a new Fulfilment House Due Diligence Scheme in 2018. This will ensure that fulfilment houses are required to assist in prevention of VAT abuse by some overseas businesses selling goods via online marketplaces. The scheme will open for registration in April 2018.

Updating the VAT Avoidance Disclosure Regime – as announced at Budget 2016 and following consultation, legislation will be introduced in Finance Bill 2017 to strengthen the regime for disclosure of avoidance of indirect tax including VAT. Provision will be made to make scheme promoters primarily responsible for disclosing schemes to HMRC and the scope of the regime will be extended to include all indirect taxes. This will have effect from 1 September 2017.

Penalty for participating in VAT fraud – as announced at Budget 2016 and following consultation, the government will legislate in Finance Bill 2017 to introduce a new and more effective penalty for participating in VAT fraud. It will be applied to businesses and company officers when they knew or should have known that their transactions were connected with VAT fraud. The penalty will improve the application of penalties to those facilitating orchestrated VAT fraud. The new penalty will be a fixed rate penalty of 30% for participants in VAT fraud. This will be implemented following Royal Assent of the Finance Bill 2017.