2020 was an eventful year in Indirect Tax. The VAT payment deferral and reduction in VAT rates for the hospitality and leisure sectors were driven by the pandemic, but there were also significant changes in HMRC policy including, in particular, HMRC’s revised view of the VAT treatment of compensation/termination payments and updated guidance in respect of the recovery of import VAT.
We already know that 2021 is yielding further change, including a number of measures that have already been announced. Many of these changes are wide ranging reforms that will impact business across the board so it is imperative that your organisation is ready for them.
We have outlined all the key dates and months that you should be aware of below.
HMRC policy changes
HMRC has revised its guidance on some important areas of VAT including the VAT treatment of early termination fees and similar compensation payments and the ability to recover import VAT.
Guidance on these areas continues to evolve, and affected businesses should review the impact on them.
1 January 2021:
Trading begins under new EU-UK Trade and Cooperation Agreement
All businesses should identify steps to be taken in relation to supply chains, VAT registrations, processes and cashflow for the new EU-UK trading arrangements. Key areas which require urgent attention include:
- Managing additional administration required in relation to sales and purchases of goods to/from the EU is likely to remain. Government grants remain available for training staff to handle imports/exports and BDO is accredited to deliver such training.
- The Agreement removes customs duty costs for UK and EU origin goods. Determining the origin of goods for customs purposes is a complex area and it is likely that many traders will face challenges in this area.
- Businesses with operations in Northern Ireland may face particular complexity which needs to be understood
- VAT registration requirements can arise in a number of contexts as a result of Brexit, for example, to continue to take advantage of EU simplifications. Even where VAT registrations are already in place in the EU, fiscal representation or an EU presence may become a requirement
- Terms of business with customers and suppliers should be reviewed. The Incoterms used will determine where duty, transport or other administrative costs will be due and who is responsible for these
- Changes to accounting systems will need to be made in response to the new rules concerning Postponed VAT Accounting (PVA), as well understanding the cash flow implications of this.
Repayments of Deferred VAT
The government is offering taxpayers that deferred VAT payments between 20 March 2020 and 30 June 2020 the option to spread their repayments over interest- free instalments March 2020 and 30 June 2020 the option to spread their repayments over interest- free instalments until January 2022.
All taxpayers that took advantage of the VAT deferral are eligible to use the New Payment Scheme, but taxpayers will need to opt in, with the process for this having opened in February 2021. Read more here.
1 March 2021:
Domestic Reverse Charge – Construction industry
Having been delayed due to COVID-19, HMRC’s new domestic reverse charge for construction services will come into force from 1 March. It will have a significant impact on the accounting practices and cash flow of businesses in the sector.
Under the new regime, the recipient rather than the supplier will be required to account for the VAT on certain construction services through its VAT return, instead of paying the VAT amount to the supplier.
The new domestic reverse charge will apply, with some exceptions, to supplies of ‘specified services’ (generally those caught by the Construction Industry Scheme) between VAT registered businesses where the recipient then makes an onward supply of those specified services. Read more here.
1 April 2021:
Making Tax Digital – “Digital links”
The next stage of Making Tax Digital for VAT requires taxpayers to implement digital links through their systems, in order to create the so-called unbroken electronic chain of information from the accounting system to the VAT return. The requirements take effect from the first VAT accounting period starting on or after 1 April 2021 depending on exact circumstances. Bridging software will not solve this issue.
HMRC have defined digital links as a digital means of transferring VAT information from one software programme to another. This could include running a VAT report in your accounting system or sales and purchase ledger reports from your sales ledger, with automatic extraction to your calculation tool. A gap in the digital link could occur, for example, where information from VAT output files is copied across to a VAT return spreadsheet.
1 July 2021:
EU e-commerce reform
The EU is continuing with its plan to change how VAT is accounted for on cross-border B2C supplies
The idea is to make it easier to account for local VAT where the consumer is based and the new rules will apply to both EU suppliers and suppliers based outside of the EU. The rules are due to come into force from 1 July 2021 but could be delayed depending on Member State readiness.
End of temporary reduced VAT rate for leisure and hospitality
The reduced 5% rate in the leisure and hospitality sector which was introduced to help businesses struggling with social distancing measures is now due to end on 31 March 2022.
The reduced rate of 5% VAT will continue to apply until 30 September 2021, before increasing to a transitional rate of 12.5% and finally returning to 20% from 1 April 2022.
Online Sales Tax
The UK Government has started discussing the potential implementation of a new 2% sales tax, which may be levied on online businesses, or as a potential new tax on consumer deliveries with a view to levelling up the playing field between online businesses and those with bricks and mortar.
This would represent a significant change of approach and would likely have a widespread impact with this new tax running alongside the present Digital Services Tax (DST).
Businesses should proactively monitor the situation and the potential impact upon them.
For further VAT advice – please contact the local member of our team.