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.

 

Spring Budget 2017 – VAT Changes

VAT registration and deregistration thresholds

The VAT registration and deregistration thresholds will increase in line with inflation as follows:

  • the turnover threshold which determines whether a person must be registered for VAT, will be increased from £83,000 to £85,000
  • the turnover threshold which determines whether a person may apply for deregistration will be increased from £81,000 to £83,000
  • the registration and deregistration threshold for relevant acquisitions from other EU member states will also be increased from £83,000 to £85,000

These changes will be effective from 1 April 2017.

VAT ‘split payments’ model to tackle evasion

As announced at Budget 2016, in addition to the measures it has already introduced to tackle the problem of overseas businesses selling goods to UK consumers via online marketplaces without paying VAT, the government is considering alternative methods of collecting VAT. The government will publish a call for evidence on 20 March 2017 on the case for a new VAT collection mechanism for online sales. This would harness technology to allow VAT to be extracted directly from transactions at the point of purchase and sent to HMRC. This type of model is often referred to as ‘split payment’.

Use and enjoyment provisions for business to consumer mobile phone services

The government will remove the VAT ‘use and enjoyment’ provision for mobile phone services provided to consumers. This will create an extra VAT cost in relation to mobile telephone use – including data – where the device is being used outside of the EU. Under current VAT rules such charges to individuals do not incur UK VAT but in future holiday makers and business travellers will pay 20% VAT.  The measure will bring those services used outside the EU within the scope of UK VAT. It will also ensure mobile phone companies can’t use the inconsistency to avoid UK VAT. This will come into force from April 2017. Secondary legislation to effect the change will be published before summer recess.

VAT fraud: the provision of labour in the construction sector

The government will launch a consultation on 20 March 2017 on a range of policy options to combat supply chain fraud in supplies of labour within the construction industry. Options include a VAT reverse charge mechanism so that the recipient accounts for VAT. It will also consider other changes including to the qualifying criteria for gross payment status within the Construction Industry Scheme. The government is consulting to ensure any option taken forward is targeted effectively, is simple to operate and minimises impacts on businesses, whilst tackling the fraud as effectively as possible.

A consultation document will be published on 20 March 2017.

VAT Disclosure of Schemes Regime (‘VADR’): consulting on reform

As announced at Autumn Statement 2016, and following consultation, the government will legislate in the Finance Bill 2017 to strengthen the regime for disclosure of indirect tax avoidance. 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. Details of the tests to apply to arrangements to determine whether they should be disclosed to HMRC will be contained in regulations.

VAT News in the Budget

Here are the key VAT changes and proposals in the Budget

VAT registration and deregistration thresholds – From 1 April 2016 the VAT registration threshold will increase from £82,000 to £83,000 and the deregistration threshold from £80,000 to £81,000.

Consultation on penalty for participating in VAT fraud – The government has announced a consultation on a new penalty for participating in VAT fraud will take place in spring 2016. Subject to the consultation, the intention is to legislate in Finance Bill 2017.

Tackling online VAT fraud in goods – the goverment has announced measures to tackle the problem of overseas traders trading on online marketplaces evading VAT. The government will legislate to provide HMRC with strengthened powers for directing the appointment of a VAT representative, and greater flexibility in seeking security. Legislation will also enable HMRC to hold online marketplaces jointly and severally liable for the unpaid VAT of an overseas business that sells goods in the UK via the online marketplace’s website.

Fulfilment House Due Diligence Scheme – the government has published a consultation on the ‘fit and proper’ standards that fulfilment houses will need to meet in order to operate. Fulfilment houses will have an obligation to register and maintain accurate records once online registration opens in 2018. They will also have to provide evidence of the due diligence they have undertaken to ensure their overseas clients are following VAT rules.

The two measures above are a response to widespread VAT fraud and complaints from legitmate businesses that they are being undercut by overseas traders using sites like Amazon and Ebay who do not register for VAT.

Extension of museum & galleries VAT refund scheme eligibility – the government is to broaden the eligibility criteria for the VAT refund scheme for museums and galleries. DCMS have today published guidance https://www.gov.uk/government/publications/vat-refunds-for-museums-and-galleries on the new criteria, which will enable support to a wider range of free museums from across the UK.

To be eligible to apply for admission to the scheme museums or galleries must:
– be open to the general public for at least 30 hours per week, without exception;
– offer free entry, without prior appointment;
– hold collections in a purpose-built building;
– display details of free entry and opening hours on the museum website

Museums and galleries will also be required to complete a strategic business case as part of the application process, including:
– proof of Arts Council England Accredited status (or equivalent)
– past and/or projected visitor figures
– information on existing and planned education programmes and community engagement work.

Isle of Man charities – The government will legislate to ensure charities subject to the jurisdiction of the High Court of the Isle of Man are capable of qualifying for UK VATcharity reliefs.

VAT refunds for shared services – As previously announced in the Autumn Statement in 2014, the government will legislate to enable named non-departmental and similar bodies to claim a refund of the VAT they incur as part of a shared service arrangement used to support their non-business activities, to encourage public bodies to share back-office services, where this results in efficiencies of scale.