Budget 2017 - VAT round up
VAT made a number of appearances in the Budget, with a mixture of some immediate and some longer term changes and consultations.
VAT registration threshold
The VAT registration threshold will remain at £85,000 for two years from April 2018 despite the recommendation from the Office of Tax Simplification to reduce it to possibly £25,000. However, the government will continue to “consult on the design of the threshold”, so additional changes are possible.
Making Tax Digital
Businesses will need to face a change to how they report VAT when Making Tax Digital ‘MTD’ goes live, which will require new software, VAT accounting functionality and processes. No business will be “mandated” to use MTD until April 2019 it is only those whose turnover exceeds the VAT registration threshold at that point who will be affected. MTD obligations will only apply to VAT accounting obligations initially. It is envisaged that MTD will apply to other taxes in due course, however, it was announced that the scope of the regime will not be extended until April 2020, at the earliest, and then only once the system has been shown to be working well. This delayed rollout provides some comfort and gives businesses a bit longer time to prepare for the change.
VAT Refunds - Government Authorities and Charities
The Chancellor specifically mentioned that the government will introduce new provisions in the Finance Bill 2017-18 permitting VAT refunds to the Scottish Police and Fire/Rescue Services and UK Combined Authorities and certain fire services in England and Wales. In addition, an Accident Rescue Charities Grant Scheme will be provided to assist accident rescue charities meet the cost of normally irrecoverable VAT.
This budget again saw a particular emphasis on tackling VAT evasion and missing VAT, which follows on from previous announcements. The online market place and construction sectors were specifically targeted:
Online Platform Providers and Traders
The Chancellor specifically mentioned strengthening and extending existing HMRC powers permitting them to hold online marketplaces responsible for the unpaid VAT of traders selling on their website platforms. Legislation will be included in the Finance Bill 2017-18 (to come into effect on Royal Assent in the spring) to extend these powers to include:
- Both UK and overseas traders. At present it is limited to overseas traders.
- 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 the online marketplace ‘knew’ or ‘should have known’ that the business should be registered for VAT in the UK. This ‘known’ or ‘should have known’ test could be a difficult one for platform providers to defend against if challenged by HMRC and therefore implies a need for them to implement considerable additional verification checks and procedures when permitting new traders to access their platforms.
- A split payment model to protect the collection of VAT revenue on sales made via these platforms, whereby the customers’ payments to the trader is split between the net sales monies, which the trader receives, and the VAT payable, which is diverted to a separate account for payment direct to HMRC. It is hoped this mechanism will prevent non-compliant traders from collecting and then not accounting for the VAT element. A call for evidence was launched in the Spring Budget 2017, and the government has announced it will publish a response in December.
- Continuing the theme of placing greater onus on digital platforms to play a wider role in policing their traders’ tax compliance, the government will publish a new call for evidence in Spring 2018 to explore what more digital platforms can do to prevent non-compliance among their users. Platform providers may wish to prepare their representations to influence this initiative. These are all significant burdens on online platform providers. For the handful of larger global platforms, this may be more manageable, however these obligations do appear to represent unwelcome barriers to entry for the start-up and smaller platform providers.
In addition, online marketplaces will be required to display a valid VAT number for a trader selling on their website (when they are provided with one by the trader) and will also need to ensure that any such VAT numbers displayed are in fact valid.
Labour supply chain in the construction sector
Following consultation, the government will introduce a VAT domestic reverse charge to prevent VAT losses in supplies of labour in the construction sector. This will shift responsibility for accounting for VAT onto the buyer in the supply chain, thus removing the opportunity for VAT to charged, collected and then stolen by rogue suppliers. Suppliers will charge without VAT, and the buyer will need to self-charge and account for VAT on the purchase and then reclaim the same VAT, as appropriate. These changes are due to take effect on or after 1 October 2019, providing time for businesses to prepare. New internal VAT accounting procedures will be needed to process these sales and purchases.
General measures for consultation
Tax evasion and the hidden economy
The government will publish a consultation response on the proposed requirement for designers of certain offshore structures (that might be misused to evade taxes), to notify HMRC of these structures and the clients using them. This work will be taken forward in conjunction with the OECD and EU.
To combat the hidden economy, the government will further consult on how to make the provision of some public sector licences conditional on being properly registered for tax. This would help to level the playing field for compliant businesses and deter trade in the hidden economy,
The government recognises the importance to businesses of the ability to postpone accounting for import VAT when importing goods from the EU and the cash flow advantage this provides. This is to be taken into account when considering potential changes following EU exit and the government will look at options to mitigate any cash flow impacts.
Currently purchases from EU countries are accounted for under the acquisition VAT accounting method by UK importing businesses. This method permits VAT to be paid and reclaimed simultaneously on the VAT return, reducing it to (usually) no more than an accounting exercise for most taxable businesses. This is a significant point for international trade and is one of the many benefits of trading arrangements agreed between EU member countries over the last 40 plus years. With the advent of Brexit, these will cease and import VAT will become the norm on all goods arriving in the UK from anywhere in the world, including from EU countries.
The post Brexit increase in import VAT for EU country imports will have a large impact on importing businesses as there is typically a delay between paying and reclaiming import VAT. Postponed accounting for import VAT does exist but is more onerous than the current acquisition VAT method for EU imports. There are various different regimes but these typically necessitate providing HMRC with expensive financial guarantees and / or oblige the importers to meet stringent conditions. This is one of the many facets of international trade that UK importing businesses will need to prepare for post Brexit and it is hoped the government will provide some form of easement in this area.
VAT on voucher sales
In another, perennially awkward, area of VAT the government has announced that it 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. This is aimed at aligning the UK with similar changes being made across the rest of the EU. This is a long-running and ongoing issue for HMRC as accounting for VAT can be delayed on the sale of vouchers and in some cases never paid. Those in the voucher market space should monitor developments as any changes could have significant VAT accounting impact.
Penalties Review - Tax administration and compliance
Last but not least, the government is looking to 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, following consultation. This was announced as applying across a range of taxes, which we conclude will also apply to VAT.
If you would like to discuss this further please get in contact with Richard Collier or your usual Mercer & Hole contact.
Date: 27th November, 2017
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