2020 was an eventful year in Indirect Tax and there has been no let up in 2021 so far either. 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 updated guidance in respect of the recovery of import VAT and a changing approach to post-Brexit customs penalties.
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 have required attention include:
- Managing additional administration required in relation to sales and purchases of goods to/from the EU.
- The Agreement removes customs duty costs for UK and EU origin goods. Determining the origin of goods for customs purposes is a complex area in which many traders face challenges.
- 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.
A new UK regime for distance sales to UK consumers was introduced
Overseas businesses selling goods directly to UK consumers and UK businesses that are not VAT registered must apply new VAT and Customs Duty rules from 1 January 2021. The main changes are:
- Removal of low import VAT relief
- For sales to consumers of consignments of goods that are under £135, there is no import VAT due, but instead there is a requirement for the seller to declare supply VAT. This means that the seller must be VAT registered in the UK and pay the VAT due on such sales to the UK VAT authorities.
- For sales over £135 to UK consumers, a non-UK seller (including EU sellers) would be able to zero-rate the export sale, but the consumer will have to pay import VAT and possibly customs duty. The duty bill will depend on whether the goods are tariff-free under the EU/UK trade agreement or other arrangements the UK has with countries outside the EU
1 March 2021:
Domestic Reverse Charge – Construction industry
HMRC’s new domestic reverse charge for construction services will come into force from 1 March and is expected to 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.
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.
30 June 2021
End of opportunity to agree an arrangement with HMRC for deferred VAT payments from 2020
The government offered taxpayers that deferred VAT payments between 20 March 2020 and 30 June 2020 the option to spread their repayments over interest- free instalments, to pay back the VAT amounts or to agree alternative arrangements for payment with them. The window for these options expired on 30 June 2021 and those that have not taken any action in respect of their deferred VAT now face potential penalties for non-compliance.
While it appears that most businesses did take action ahead of the required deadlines, it is clear that a significant number did not and these businesses now face potential enforcement action from HMRC.
1 July 2021:
EU e-commerce reform
From 1 July 2021 new EU rules were introduced as part of widespread reforms linked to 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.
So far the new rules appear to have had a significant impact on SMEs in particular. Equally anyone trading on a marketplace platform or who is based outside of the EU but making supplies to EU consumers is likely to be particularly affected. We are advising such businesses to review the new rules to understand the impact on them.
HMRC’s new approach to post-Brexit customs penalties is announced
Since 1 January 2021, all goods imported into the UK from the EU require an import declaration. As a transitional measure, HMRC allowed businesses to make deferred Customs declarations up to 175 days (nearly 6 months) after the date of import and pay any relevant duty at that stage. With the current lack of resource amongst freight forwarders and customs agents, we are starting to see increasing incidences of deferred declarations NOT being submitted to HMRC.
HMRC has recently announced that is taking a firm line where goods have been imported from the EU post 1 January 2021 and no Customs declarations have been made. While many duties on goods imported from the EU are now set at zero, even if no duty is payable, HMRC has stated that it will charge penalties for failure to make declarations. Penalties can range from £250 to £2,500 for each failure to make a declaration. Read more here.
1 October 2021 and 1 April 2022
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.
1 April 2022
Introduction of new Plastic Packaging Tax
From April 2022, all businesses trading in the UK that use more than 10 tonnes of plastic packaging a year may need to register for and pay the Plastic Packaging tax at £200 per ton.
Businesses should check whether they are affected and take steps to be ready for the changes if so. Read more.
Government consultations on VAT reform
As it sets out its vision for the UK’s future of the UK VAT regime, the Government is consulting on reforms to a number of areas including:
- A potential new approach to the ‘sharing economy’
- New VAT recovery regime for the public sector
- Review of the scope of the land and property VAT exemption
- Notification of uncertain tax treatments for large businesses
- Consultation on value-shifting where consideration is apportioned between items attracting different VAT liabilities
Organisations which are potentially impacted by such reforms should be aware of the proposals and consultations/requests for evidence under way proactively responding to these if appropriate.
For further VAT advice – please contact Will Tipping.