In this month’s update we focus on the VAT announcements in the March Budget and reflect on the first few days of the new domestic reverse charge in the construction sector.
Extension to reduced rate of VAT in the hospitality sector
The Chancellor announced that the temporary reduced rate of VAT in the hospitality sector is to be extended, with the current 5% rate continuing until 30 September 2021. At that point it will increase to a new rate of 12.5%, which will apply to 31 March 2022, and from 1 April 2022 the 20% rate will apply once more.
The ‘hospitality sector’ comprises:
- Hotel and holiday accommodation including caravan sites and holiday parks.
- Catering, including meals and non-alcoholic drinks eaten in, hot takeaway foods and hot takeaway drinks.
- Visitor attractions, including shows, theatres, circuses, fairs, amusement parks, concerts, museums, zoos, safari parks, cinemas, exhibitions, plus similar cultural events and facilities where the cultural exemption does not apply.
HM Revenue & Customs’ (HMRC’s) commentary on the extension does not suggest anti-forestalling provisions will be applied when the rate increases from 1 October 2021 and then again from 1 April 2022. This is consistent with how the reduced rate was implemented last July and the absence of such provisions provides businesses with the opportunity to fix a time of supply when the rate is still at 5% by issuing VAT invoices before the rate increase.
Comment: The extension of the reduced rate and the phased approach of reintroducing the 20% rate is a welcome move by the Chancellor to support a sector which has been severely impacted by the pandemic. It had been suggested the 5% rate for the hospitality sector would be made permanent and the tourist sector has long pushed for a reduced rate of VAT to be applied, even before Coronavirus. It remains to be seen how well the sector will recover as we come out of the latest lockdown and whether a further extension will be considered should hospitality continue to struggle.
Interestingly, the introduction of a new reduced rate of VAT of 12.5% would not have been possible whilst the UK was part of the EU VAT system. Its introduction from 1 October 2021 is a reflection of UK legislator’s powers to adopt a UK position rather than have to comply with the provisions of the EU VAT Directive. It will be interesting to see how this new freedom will be utilised in the future.
Our FAQs contain more information on the VAT rate changes in the hospitality sector. Read more.
Covid-19 VAT deferment scheme
Legislation is to be included in the Finance Bill to cover the implementation of the VAT deferral payment scheme and HMRC’s administration of it.
It has previously been announced that liabilities deferred during the first lockdown (for payments due between 20 March and to 30 June 2020) could be paid in instalments. Businesses are required to opt in for further deferral. HMRC launched the application process on 23 February 2021.
The new measure gives businesses the chance to pay their deferred VAT liability over a maximum of 11 instalments. The opting in process closes on 21 June 2021, by which time the outstanding balance will need to be paid over eight instalments. The first instalment payment is made as part of that opting in process and thereafter equal monthly payments will need to be made typically by direct debit, unless other specific payment arrangements are made with HMRC.
The legislation will include provisions for a 5% penalty in the event none of the below has occurred by 30 June 2021:
- Deferred VAT liability paid in full.
- Opting into the new payment scheme completed by 21 June 2021.
- Alternative payment arrangements made with HMRC by 30 June 2021.
This 5% penalty is specific to the deferred VAT scheme, with the usual default surcharge penalty regime applying to all other instances of late VAT filings and/or payments.
Comment: Whilst the option to pay deferred VAT liabilities in instalments was announced last year, the details of its implementation were gradually published earlier in January and February, with the opting in process only becoming available on 23 February. Previous guidance had not been specific on the size of penalties, but now the legislation confirms this is a flat 5% penalty which will be applied to deferred liabilities rather than default surcharge penalties.
Many businesses are facing cash flow issues due to the pandemic and lockdown, and are still struggling to pay their VAT liabilities. The opportunity is still there to discuss with HMRC additional time to pay arrangements for liabilities which could not be deferred under the VAT deferment scheme and we would encourage our clients to speak with HMRC with regards to unpaid liabilities from recent VAT returns submitted.
Please get in touch with your usual Saffery Champness partner for further assistance.
Making Tax Digital
The Finance Bill will also include legislation which covers the extension of the scope of Making Tax Digital (MTD) for VAT to all VAT registered persons, regardless of turnover.
As previously announced, from 1 April 2022 all VAT registered persons will need to submit VAT returns through MTD compatible software. Currently, such a requirement only applies to persons with a taxable turnover greater than £85,000 (the VAT registration threshold).
Comment: The legislation formalises what we already knew and helps to focus the mind for businesses having to prepare for this requirement if they were not previously obligated to file VAT returns under MTD rules.
The widening of the scope of MTD is the latest step of its phased implementation. We shortly have the end of the soft-landing period on 31 March 2021 with respect to digital links requirement. Businesses now registering for MTD for the first time because of the widening of its scope, will need to be mindful of these digital link requirements.
Please get in touch with your usual Saffery Champness partner for further assistance.
In the Budget, the Chancellor announced that new freeports would be designated. These have not existed in the UK since 2012. A freeport is chosen by the government as a location where businesses can benefit from tax reliefs, in order to incentivise investment and boost employment. Currently, eight sites have been announced, the locations of which are: East Midlands Airport, Felixstowe and Harwich, Humber, Liverpool City Region, Plymouth, Solent, Thames, and Teesside.
Broadly, these are special trade zones that have access to specific tax reliefs and rates. From an indirect tax perspective, there will be tariff benefits for businesses bringing goods into certain areas of a freeport. Whilst there were no specific details in the Budget documents, the government proposed in the freeport consultation issued in October last year that freeports would benefit from Customs Duty, Excise Duty and import VAT relief, with such liabilities being suspended until the goods leave the freeport and enter free circulation (similar to customs warehousing regimes).
Comment: Freeports, or free trade zones as they are often referred to, are a feature in many countries and can be very attractive to businesses because of the tax reliefs and easements which become available. We await with interest the specifics of reliefs that will apply to import VAT and duty and details of how transactions taking place within a freeport will be handled for VAT purposes. We will report further as and when HMRC releases guidance.
Domestic reverse charge in the construction sector
The domestic reverse charge (DRC) in the construction sector was finally introduced on 1 March 2021, after two previous postponements.
The DRC applies to supplies of construction services that are within the scope of the Construction Industry Scheme (CIS). It applies when supplies of such services are made to VAT and CIS-registered businesses that are themselves making an onward supply of construction.
Normal VAT rules apply when construction services are supplied to ‘end users’ or ‘intermediary suppliers’ and these are specifically defined terms. Whilst supplies made by businesses that are not construction services are unaffected, there is still a need for those businesses to inform the contractors that supply them with construction services of their end user status.
Comment: Despite calls from the sector to postpone the implementation further or to even to scrap the plans altogether, the DRC has come into effect. As businesses work to understand their VAT position within construction supply chains, it is becoming evident that there is widespread confusion and uncertainty with respect to what is within the scope of CIS and therefore subject to the VAT reverse charge.
HMRC has indicated a light touch where errors in the application of the reverse charge in the first six months occur. HMRC’s position is that if a supplier is in doubt, a supply is subject to reverse charge. This approach does not necessarily help affected businesses gain certainty as to what they are doing and whether what they are telling their suppliers and customers is actually correct. We are already seeing some disharmony within supply chains where a consistent approach is not being adopted. It is early days and we would hope HMRC will release further guidance in the coming months to help address specific issues which businesses are facing.