The 2021 Budget - VAT news
posted 3rd March 2021
It is not very often that VAT makes the Budget speech itself, but I make this at least two Budgets in a row now! Today's Budget speech brought us the news that the temporary reduced rate for the tourism and hospitality sector will be extended, and that the standard rate of VAT will remain frozen throughout this Parliament. VAT-wise, we usually see details of any other changes in the fine print, and there is no exception here as a few other VAT measures have been announced.
We were however hoping that today's "fine print" would bring us further clarity on how the TOMS rules will work for businesses selling UK travel going forward and I thought I was finally going to be bringing you some confirmation on the outstanding UK TOMS issues going forward. Alas, this does not appear to have yet materialised, meaning we may have to continue looking into our crystal balls for a while longer. Interestingly (well, perhaps for me only), TOMS did make it into the red book, in the form of the Government's cost figures for the effect of zero rating the TOMS margin for EU travel going forward, which the Government estimates at £105m per year by 2025-26.
I have set out below the main VAT measures in this year's budget, and will update this once we have further news on TOMS.
Extension to the temporary reduced rate of VAT of 5% until 30 September 2021 and a 12.5% rate for the 6 months after
In the 2020 Summer Economic statement, a temporary reduced rate of VAT was introduced for supplies of tourist accommodation, catering and admission in the period 15 July to 12 January. This was extended to 31 March 2021, and is now extended to 30 September 2021. Hopefully this will mean that those benefitting from the reduced rate will be able to take advantage of it throughout the summer months. At the end of this period, there will remain a reduced rate in place for the next six month to 31 March 2022, but this will be at 12.5%.
The scope of this reduced rate has not changed and more detail can be found here, although we are hoping for some further clarification on exactly what is included within the scope. Some notable areas in which we require clarification includes what constitutes a "sporting event" for the purpose of the exclusion for admission to sporting events, and whether HMRC will permit businesses using TOMS to take advantage of these reduced rates for margin scheme supplies.
One important point to note here relates to the "tax point" of the service. It is only services with tax points within the period in question which will qualify for the reduced rate. The normal "tax point" for services is that it is the earlier of the date the service is completed (e.g. check out date for hotel accommodation), the date of payment, and the invoice date. However, there are a few different options for tax points when there is a VAT rate change, and businesses may be able to use these options to their advantage.
The reductions for those of you using the Flat Rate Scheme will remains in place, and I expect this will mean new rates for the period 1 October 2021 to 31 March 2022 too.
You will also want to ensure in advance that your systems can handle the new reduced rate of 12.5%. Apparently the last time the UK had a 12.5% VAT rate was some time around 1979 as a higher rate for petrol and some other consumer "luxuries" so, understandably, accounting systems may need to be programmed!
Extension of Making Tax Digital (MTD) to all VAT registered businesses
The new MTD rules currently apply compulsorily only to businesses making UK taxable supplies at above the VAT registration threshold. For return periods starting on or after 1 April 2022, these rules will apply to all VAT registered businesses. Many businesses have avoided the need to comply with MTD rules where their sales are mainly or wholly outside the scope of UK VAT (for example, wholesale tour operators selling packages to non-UK businesses). This announcement will bring these businesses within the scope of the rules too.
Broadly speaking, these rules mean that the business is required to keep all records digitally, and have a full electronic "audit trail" between their accounting system and the VAT return file. The VAT return must then be submitted to HMRC electronically, either via an accounting system or through bridging software. When this measure was introduced for businesses trading above the VAT threshold, a "soft-landing" period was introduced whereby, for a period of time, only certain digital requirements were in place. There is no mention yet as to whether a similar "soft-landing" period will be available for these businesses. It would be advisable for any business which has not currently signed up to MTD to review this over the coming months. Please do see the link above, which gives some detail on the process for both accounting systems and bridging software.
Maintaining rates and thresholds
The Government announced that the standard rate of VAT will not be increased throughout this Parliament.
They also announced that the VAT registration threshold will remain at £85,000, with a deregistration threshold of £83,000 until 31 March 2024. The Government has been reviewing this for a number of years, with a consultation launched in 2017 to assess whether it would be more effective to reduce the threshold considerably (I think at the time, £40k or £50k were suggested, to bring this in line with the higher rate income tax threshold). Although the results do not appear to be conclusive either way, the tone of this announcement suggests this may be considered in the future, but perhaps not now, during a time of such economic uncertainty for businesses.
VAT deferrals from the February, March and April 2020 quarters
This is not a specific Budget announcement but it has been highlighted within the Budget and I think it is important to note. Many businesses chose to defer VAT payments for the quarter ending February, March or April 2020, and HMRC had originally said that these amounts must be repaid in full by 31 March 2021. However, late last year, they announced that there would be a way to defer these payments further and spread them out into 11 equal installments through the 2021/22 tax year. This optional scheme is now open. Please note that this is not applied automatically - you must either join this scheme between now and 21 June and set up a direct debit OR make all outstanding payments from your deferred quarter by 31 March. For those who are unfortunately not yet in a position to take either option, HMRC will still consider "time to pay" arrangements too, but you must call to discuss this with them first. To join the installment scheme or to pay your deferred VAT in full, please follow this link.
Other VAT measures announced
One other "fine print announcement" relates to a potential reform of the penalty system for late payments and late submissions of returns. We had a "new" Penalty Regime in 2010 for tax errors which is based on the reason for the error, but so far penalties for late payments have remained based on the amount of outstanding tax on an increasing scale. The Government has said they expect the new system to be "fairer and more consistent" and will be points-based, with a financial penalty only issued once a certain threshold is reached. This reform will come into effect for VAT periods starting on or after 1 April 2022.
There is also further confirmation of the zero rate for electronic publications and the temporary zero rate for PPE.
If you would like to discuss any of these measures, or have any other questions, please do contact me on 07971 642789 and laura@vatnav.com
