Whatever may have been on your VAT wish list for this Budget I’d guess that right now you’ll be feeling a little disappointed.
With the UK now outside of the EU many had been hoping for a flexing of freedoms to increase the use of reduced VAT rates or add more into the Zero-rating Reliefs. It was not to be. Calls to cut VAT on domestic fuel costs from the current 5% level went unheeded as did any extension of time period applying for the lower 12.5% VAT rate for the Hospitality sector which will end on the 31 March 2022.
What did the Autumn statement hold from the VAT perspective?
The direction of travel in VAT and Tax administration is clear – The Chancellor wishes to ensure that resources are made available to HMRC to support its drive:
To bear down on Tax Avoidance and Evasion
We are noticing an increased level of activity from HMRC as their control teams return to pre-CV levels of enquiries – yet often VAT assessments have been issued which demand much closer scrutiny by any taxpayer as to their validity and justification.
One recent case we handled dealt with what was acceptable forms of alternative VAT evidence for VAT recovery and saw an assessment reduced from £1.4m to just £7k.
The Autumn Statement also reminded us of the reform of penalties for the late submission and late payment of taxes – the VAT regime will change from the 1 April 2022 with Income Tax Self-Assessment falling in line on 6 April 2024.
The new requirement for large businesses to notify HMRC of a tax position they take – whether in VAT, Corporation Tax or Income Tax – which has an element of uncertainty to it (has a provision been made in the accounts for example or is it contrary to HMRC’s known view) will be effective from the 1 April 2022 and there may be further steps to notify where there is the possibility that a Tribunal would judge against the taxpayer should the matter head to the courts. Whilst this targets large businesses it adds to the feeling that the taxpayer will have the responsibility to notify HMRC in advance of any arrangements that quite legitimately seek to mitigate a VAT or any other Tax cost. HMRC may be under pressure for pre-approval of arrangements to an extent, they may find even more of a resources challenge than they experience currently as taxpayers attempt to maintain good compliance.
To build a Modern Digital Tax system fit for the 21st Century
Making VAT Digital requirements across internal VAT accounting systems have been implemented fully from 1 April 2021, yet recent research suggests that across SMEs 39% of businesses lack the digital tools to be compliant relying on spreadsheets and manual processes. Clients large and small do need to ensure their internal VAT processes meet the digital linking criteria expected. Sole Traders and Landlords will have an extra year to prepare for Making Tax Digital under the Income Tax Self-Assessment regime from 6 April 2024 with general partnerships joining in April 2025 – the direction of travel is clear.
To modernise HMRC’s IT systems and improve the quality, resilience and security of its digital services
The last year has seen real pressure on internal systems in HMRC including incorrect postings to clients VAT accounts to create liabilities that didn’t exist therefore investment in this area is to be welcome. However, as the Chancellor rose to speak, we were hearing of Voluntary Disclosures for VAT reclaims submitted in June still not being processed by HMRC and unlikely to be reviewed before November. Not good news for financially stretched organisations relying on any repayment claim.
To improve our international competitiveness and create a truly global Britain
Many SMEs failed to access in time the Government’s SME Brexit Fund which closed on the 30th June 2021. Designed to support businesses with funding for advice and training on areas such as navigating the new Customs Declaration requirements and VAT rules for trading into the EU after Brexit, it was a pity not to hear that this initiative would be reopened as a support to help grow our export markets. Online Retailers have been particularly hard hit by the new EU trading rules in this regard and would have welcomed such news.
Second-Hand Margin Vehicles
Readers will be aware of the re-opening of the Northern Ireland Protocol discussion, and it was noted in this Statement that should an agreement with the EU be achieved, they will legislate to extend the scheme to apply in Northern Ireland in respect of motor vehicles sourced from the UK. It will apply to vehicles first registered in the UK prior to 1 January 2021 and will enable NI based car dealerships comparable VAT treatment on second-hand cars to that in the UK.
There will be a VAT exemption that applies to imports of dental protheses by registered dentists and other dental care professionals and will ensure the VAT treatment on goods moving between NI and the UK is consistent. Who says the Autumn Statement had no bite to it! This one will be back dated to the 1 January 2021 once Royal Assent is achieved.
Cars in General
It should be remembered that as the UK encourages a move to electric vehicles that VAT is charged at 20% at commercial charging points. Disappointing not to see the VAT rate cut in this regard especially as the Chancellor seemed to fall on the side of keeping petrol & diesel car use costs in general as they are by freezing company car tax rates until 2025 and freezing HGV vehicle excise duty for 2022-23 and suspending the HGV Levy for another 12 months from August 2022.
VAT in Free Zones
Freeports are a current topic of conversation across the UK as to whether these VAT free zone for businesses to locate within offer real economic growth potential. The statement included a tidying up on the VAT front to ensure that when goods are removed from such Free Zones a VAT charge is crystallised. This measure will take effect from the 3 November 2021.
VAT Treatment on Fund Management Fees
In the number of consultations noted in the statement there was one which will look at the VAT treatment of Fund Management Fees – where simplification would be welcomed.
What our VAT experts say:
An Autumn Statement short on VAT specifics it has to be said but it’s the underlying direction of travel in VAT management that all organisations need to focus on. Making VAT Digital compliance and effective VAT awareness on importing and exporting goods as new rules continue to bed in should be high on any risk management register.
New indirect taxes continue to be under consideration – the Statement refers to the ongoing consultation on a UK wide Online Sales Tax and we’ve already seen the new Plastic Packaging Tax roll out.
VAT is an effective tax in encouraging changes in behaviour whether that’s in business or us as individuals. More could have been done to drive the environmental agenda with lower VAT rates. VAT registered organisations need to reflect that the four key areas of HMRC strategy will continue to ensure that VAT contributes the second largest source of Tax revenues in the UK. It’s not a tax that’s going away.
More Autumn Budget related insights
If you want to know more about our comments on the Autumn budget, check out our commentary for more information on how the budget will affect you!
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