Budget 2018 – A mixed bag of VAT challenges

In the Budget announcement, there were an unusual number of updates for VAT, some referring to existing or ongoing initiatives, and some new. In this article, I have covered five main areas; Making Tax Digital (MTD) and groups, construction, retail matters, general adjustments as well as HMRC anti-avoidance initiatives.

There were also some changes to higher education and an update on reduced tourist rates, which I am happy to discuss should this resonate with you.

1. Making Tax Digital frozen thresholds

The main announcement was the freezing of the headline VAT registration threshold at £85,000 for another two years until 31 March 2022 (with the de-registration limit remaining at £83,000).

Those with an eye on the MTD requirements that affect businesses trading above this threshold, from 1 April 2019, will note that more business will fall within VAT and MTD as inflation erodes the value of the threshold protection. For more information on MTD requirements and the necessary preparations to factor in, please click here to watch a webinar that Business Advisory Partner, Ross Lane and I recorded last week.

VAT groups – all change and MTD

It was announced that VAT grouping rule changes will shortly be published in advance of implementation from 1 April 2019. These will extend eligibility to join a VAT group to some non-corporate entities, widening the appeal of VAT grouping. HMRC’s new guidance will also reiterate its protection of the revenue powers regarding VAT groups, the treatment of UK fixed establishments, as well as the rules on bought-in services to ensure the latter do not escape the tax net.

It was recently announced that VAT groups will be amongst those benefiting from a six-month extension to the MTD implementation date – i.e. until 1 October 2019. However, it is not clear if it will be possible to create a new group under the new rules in time to qualify for this MTD extension, as MTD for most businesses will commence 1 April 2019. There is the possibility of expanding existing groups to potentially include individuals and other newly eligible entities, thus affording the six-month MTD extension to the latter.

2. Labouring under construction industry compliance

The construction industry was reminded of a major compliance burden that has arisen on VAT, which could be a cause of potential dispute with HMRC. A domestic reverse charge (or self-charge) of VAT for labour services is to be introduced with effect from 1 October 2019. This would prevent suppliers of labour from charging and collecting VAT and then not paying this over to HMRC. The change requires that the recipients of these labour services charge themselves VAT and account for it to HMRC instead of paying VAT to suppliers, who will no longer be permitted to charge VAT. The details of the new arrangements will be worth reviewing and the potential for disputes with HMRC and suppliers is worth considering.

A slight revision to these proposals was announced to ensure more effective application, however these rules will add to the already complex VAT compliance for both suppliers of labour and their customers. If not correctly addressed, these rules could lead to double payment of VAT, VAT recovery issues and prolonged disputes with HMRC and others. The industry already faces some of the heaviest VAT compliance burdens, along with complex rules, the possibility of multiple VAT rates and self-billing risks to name a few. Early advice on these latest obligations can address VAT accounting procedural changes now to manage the risk of disruption from laborious VAT enquiries in future.

3. HMRC cash in on EU retail voucher changes

The retail sector already faces challenges in the high street and online. During the announcement it was reiterated that the UK’s implementation of the EU-wide voucher rule changes will come into effect from 1 January 2019. This will impact those businesses issuing, on-selling and redeeming vouchers and could alter the time when VAT is accounted for and the value. The new rules will have a transitional impact on existing vouchers, which could generate accounting issues and potentially higher costs. Those affected are strongly advised to review procedures in advance, particularly in the busy run up to the festive season, as accounting system adjustments could be significant.

Online commerce split on compliance

The online retail sector does not escape attention. In addition to the proposed new Digital Services Tax for larger platforms, the government announced it will publish a response to consultations on the split payment model designed to tackle online VAT fraud/evasion by third country sellers. This will be of interest to online traders and particularly platforms and payment collection businesses. The changes seek to ensure VAT is accounted for directly to HMRC on sales by splitting tax collected from net sales receipts and paying the tax direct to HMRC rather than to the vendor. Where agency arrangements and commission payments are in place, the scope for transactional complexity could increase. Affected parties may wish to advise and influence the Industry Working Group which will be established to try to address the challenges arising from this new approach.

4. HMRC adjustments for all

All sectors will be affected by new HMRC rules to tighten up VAT accounting for adjustments and the VAT owed thereon. Where ‘unfulfilled sales or supplies’ arise, the government are concerned that VAT may not be accounted for on these transactions. To address this, amendments will be introduced from 1 March 2019 to align these scenarios with the VAT prepayment rules.The effect will be to bring all prepayments for goods and services into the scope of VAT where customers have failed to collect what they have paid for, have not received a refund, but have been charged VAT.

Similarly, new rules will affect adjustments to VAT following a reduction in price, ensuring a credit note is issued to customers. The stated aim is to improve transparency and prevent businesses benefiting from the VAT that should be due back either to the customer or the Treasury.

Concern was also expressed around Electronic Sales Suppression (ESS), i.e. businesses misusing electronic till systems to hide or reduce the value of individual transactions and their tax liabilities. A call for evidence will be made later in the year.

5. HMRC Insure against Avoidance Loops

UK insurers currently creating offshore loops via associates in non-VAT territories, in order to supply their UK customers, can thereby generate VAT reclaims that their UK competitors cannot achieve. The newly announced rules will look to target this specific avoidance and ensure UK based insurers all operate on a level playing field of limited VAT recovery on costs.

The government will also publish an updated offshore tax compliance strategy, as well as enact new legislation to permit new international disclosure rules on offshore structures capable of tax avoidance or evasion. Meanwhile personal responsibility for tax will be strengthened with directors and others involved in tax avoidance, evasion or phoenix trading to be held jointly and severally liable for company tax liabilities, in cases where companies are at risk of being deliberately entered into insolvency arrangements.

The chancellor also specifically referred in his speech to ending the practice of purchasing services through overseas branches to avoid paying UK VAT (which is possible due to the special status of branches in VAT law). This is likely to affect the financial and insurance sectors.

In addition, the government will consider new rules in Finance Bill 2019-20 for a tax registration check as part of some public sector licence renewals, requiring applicants to prove they are registered for appropriate taxes before they can obtain licences.The stated intention is to combat the hidden economy and is likely to impact the construction and outsourcing sectors.

If you would like to discuss any of the above matters further please get in touch with me or your usual Mercer & Hole contact.