Value Added Tax

The VAT rule changes for building contractors and sub-contractors that were expected to come into effect on 1 October 2020 have been delayed for a further 5 months until 1 March 2021. The delay is due to the impact of the Coronavirus pandemic.

The new rules will make the supply of construction services between construction or building businesses subject to the domestic reverse charge. The reverse charge will only apply to supplies of specified construction services to other businesses in the construction sector. From 1 March 2021, sub-contractors will no longer add VAT to their supplies to most building customers, instead, contractors will be obliged to pay the deemed output VAT on behalf of their registered sub-contractor suppliers. This is known as the Domestic Reverse Charge.

Please note, although contractors will be responsible for paying the deemed output tax, on their VAT return they can usually claim back the same amount as input VAT.

The new rules were originally expected to come into force from 1 October 2019. The initial 12 month delay was announced following intense lobbying by the construction industry who had argued that many businesses in the sector were unprepared for the change.  HMRC have confirmed, that even with this additional delay, they remain committed to the implementation of the Domestic Reverse Charge.

There will also be an amendment to the original legislation, which was laid in April 2019, to make it a requirement that for businesses to be excluded from the reverse charge because they are end users or intermediary suppliers, they must inform their sub-contractors in writing that they are end users or intermediary suppliers. HMRC says that this change is designed to make sure both parties are clear whether the supply is excluded from the reverse charge.

A voluntary VAT deregistration can be made if you do not expect your taxable turnover to exceed the VAT deregistration limit. The current deregistration limit is £83,000.

If you are running a small business that has been adversely affected by the Coronavirus pandemic, this could be an opportune time to consider whether or not to voluntarily deregister. The deregistration cannot be backdated and must be from a current or future date where you expect sales in the next 12 months to be less than £83,000.

A compulsory VAT deregistration is usually required if you:

• Stop making taxable supplies
• Sell your business
• Change legal status
• Disband a VAT group
• Join a VAT group
• Join the agricultural flat rate scheme

You will be required to submit a final VAT Return for the period up to and including the VAT deregistration date.

If you are considering voluntarily cancelling your VAT registration, there are a number of issues that must be considered. Whether or not this is a good idea depends on your specific circumstances. We would be happy to help you consider your options.

If you mainly sell goods or services to individuals who have not been able to reclaim the VAT you charge, deregistration may help you to restore a competitive advantage.

 

The VAT bad debt relief rules allow businesses to claim bad debt relief and reclaim the VAT they have paid to HMRC. This can happen when an invoice has been issued to a customer and no payment has been received after an extended period of time (usually 6 months after the due date) has elapsed.

Under the normal VAT accounting rules, a business supplying goods or services usually accounts for VAT at the time an invoice is raised irrespective of whether payment has been received or not. There are a number of conditions which must be met in order to claim bad debt relief.

The conditions are set out in HMRC’s Notice 700/18 entitled Relief from VAT on bad debts:

1. You must already have accounted for the VAT on the supplies and paid it to HMRC.
2. You must have written off the debt in your day to day VAT accounts and transferred it to a separate bad debt account.
3. The value of the supply must not be more than the customary selling price.
4. The debt must not have been paid, sold or factored under a valid legal assignment.
5. The debt must have remained unpaid for a period of 6 months after the later of the time payment was due and payable and the date of the supply (one year after the date of supply for supplies made from 1 April 1989 to 31 March 1992), and
6. if the goods were supplied before 19 March 1997, ownership must have passed to your customer, or through the customer to a third party.
7. For supplies made to a VAT-registered customer between 26 November 1996 and 30 April 1997, you must send a notice to them. A copy of the notice must also be retained.

Businesses that account for VAT under the Cash Accounting Scheme and businesses that use certain retails schemes only pay VAT on the cash amounts they have actually received from customers. This makes bad debt relief claims unnecessary as VAT is only paid when the customer pays what is owed. Small businesses that suffer from a significant amount of bad debts should consider if it would be beneficial to apply to use the Cash Accounting Scheme.

It has been revealed by HM Treasury that the VAT collected on donated personal protective equipment (PPE) will be given to charities supporting the NHS and care workers. This measure will apply to all the VAT collected on donations made from 1 March until 30 April – the period between PPE donations starting and when the temporary zero VAT rate on PPE became effective on 1 May 2020.

The government donation will be made to support frontline workers affected by Covid-19 equally through the Care Workers Charity and NHS Charities Together. The donation which will be equivalent to the VAT collected is expected to be worth between £500,000 to £1 million. The Department for Health and Social Care will make the donation of the VAT on the government’s behalf.

Chief Secretary to the Treasury Steve Barclay said:

'Frontline health workers are fighting Coronavirus day in, day out – in our hospitals, care homes and communities. Whilst we will never be able to fully express our gratitude to them, we want these donations to be a small sign of our appreciation. From the Treasury and the whole government, we say thank you for all you are doing.'

The government has introduced a zero-rate of VAT on the sale of personal protective equipment (PPE) for Covid-19. The temporary measure will apply from 1 May 2020 until 31 July 2020 unless any further extensions are announced. This move will save care homes and businesses dealing with the Coronavirus outbreak more than £100 million.

The government is acting under an exceptional basis allowed by EU rules during health emergencies. The European Commission recently indicated support for member states to introduce temporary VAT reliefs to mitigate the impacts of the Covid-19 pandemic. The UK remains bound by EU VAT law until the end of the transition period.

Products covered by the zero rate include:

• disposable gloves
• disposable plastic aprons
• disposable fluid-resistant coveralls or gowns
• surgical masks – including fluid-resistant type IIR surgical masks
• filtering face piece respirators
• eye and face protection – including single or reusable full face visors or goggles

The reduction in VAT will particularly benefit care providers, who are often unable to reclaim the 20% VAT they incur on their purchases.

It was announced as part of the Spring Budget measures that the zero rate of VAT would apply to all e-books from 1 December 2020. The date of this change has now been brought forward and came into effect on 1 May 2020. This will be a welcome boost to readers and publishers during the coronavirus outbreak.

This change will bring electronic books, magazines, newspapers and other academic journals in line with their printed equivalents which have always been free of VAT (zero-rated). This change could potentially reduce the cost of a £12 e-book by £2 and e-newspapers subscriptions by up to £25 a year. Some of the biggest online retailers in the UK have already confirmed that the standard prices of e-books will be reduced with immediate effect.

The Chancellor of the Exchequer Rishi Sunak said:

'We want to make it as easy as possible for people across the UK to get hold of the books they want whilst they are staying at home and saving lives. That is why we have fast tracked plans to scrap VAT on all e-publications, which will make it cheaper for publishers to sell their books, magazines and newspapers.'

The government also announced plans to spend £35m on newspaper advertising over the next three months as part of its Covid-19 communications campaign. The extra advertising revenue will be split between local, regional and national print media.

It was announced at the end of March that VAT registered businesses have the option to defer any VAT payments due between 20 March 2020 and 30 June 2020.

HMRC’s guidance for the deferral of VAT payments has been updated and states that you can only defer the following:

• quarterly and monthly VAT returns’ payments for the periods ending in February, March and April
• payments on account due between 20 March 2020 and 30 June 2020
• annual accounting advance payments due between 20 March 2020 and 30 June 2020

The deferral does not cover payments for VAT MOSS or import VAT.

There is no application process required to request this deferral as permission is automatic and all VAT-registered UK businesses are eligible. However, businesses can still choose to pay any VAT due as normal. HMRC are continuing to process VAT reclaims and refunds as normal.

It is important to note that this is only a deferral and whilst no interest or penalties will be charged, the full amount of VAT due will still need to be repaid. If you choose to defer your VAT payment as a result of Coronavirus then you must pay the VAT due to HMRC on or before 31 March 2021.

If you are planning to make use of the special deferral period and you pay by direct debit, then you must cancel your direct debit in order to benefit from the VAT deferral. You can cancel your direct debit online using online banking or contact your bank if necessary. Please make sure that you do this as soon as possible to ensure that HMRC do not automatically collect the VAT due. You will also need to remember to set up the direct debit again when your next VAT payment is due (if no further deferrals are announced).

The new VAT road fuel scale charges have been published. The changes amend the VAT scale charges for taxing private use of road fuel to reflect changes in fuel prices.

The new fuel scale charges must be used by companies from the start of their next prescribed accounting period beginning on or after 1 May 2020. The fuel scale rates continue to encourage the use of cars with low CO2 emissions.

The revalorisation of fuel scale charges is no longer part of the Budget process and the tables are published by HMRC annually.

Where the CO2 emission figure is not a multiple of five, the figure is rounded down to the next multiple of five to determine the level of the charge. For a bi-fuel vehicle which have two CO2 emissions figures, the lower of the two figures should be used. There are special rules for cars which are too old to have a CO2 emissions figure.

In another move to help businesses the government announced that VAT registered businesses can defer any VAT payments due between 20 March 2020 and 30 June 2020. There is no application process required to defer the relevant payment. However, businesses can still choose to pay any VAT due as normal. 

It is important to note that this is only a deferral and whilst no interest or penalties will be due on deferred payments, the full amount of VAT due will still need to be paid. If you choose to defer your VAT payment as a result of Coronavirus then you must pay the VAT due to HMRC on or before 31 March 2021.

If you are planning to make use of the deferral offer, and you pay by direct debit, then you should cancel your direct debit. You can cancel your direct debit online using online banking or contact your bank if necessary. Please make sure that you do this as soon as possible to ensure that HMRC do not automatically collect the VAT due. You should also keep a note to re-establish the direct debit when your next VAT payment is due (if no further deferrals are announced). 

HMRC has said that they will continue to process VAT reclaims and refunds as normal during this time.

It has been confirmed that the taxable turnover threshold, that determines whether businesses should be registered for VAT, will be frozen at £85,000 until 31 March 2022. The taxable turnover threshold that determines whether businesses can apply for deregistration will also be frozen at the current rate of £83,000 for the same time period.

Businesses are required to register for VAT if they meet either of the following two conditions:

1. At the end of any month, the value of the taxable supplies made in the past 12 months or less has exceeded £85,000; or
2. At any time, there are reasonable grounds for believing that the value of taxable supplies to be made in the next 30 days alone will exceed £85,000.

In other VAT related Budget news, the Chancellor confirmed that from 1 January 2021 there will be no VAT whatsoever on women’s sanitary products. This will be put in place by the introduction of a new zero rate of VAT for women’s sanitary products, a move that would not have been possible whilst the UK was part of the EU.

In addition, a zero rate of VAT will apply to all e-books from 1 December 2020. This will mean that all e-books, e-newspapers, e-magazines and academic e-journals will have the same VAT treatment as their physical counterparts.