Budget 2020 - Indirect Taxes

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Budget 2020 included a number of changes to VAT and other indirect taxes. VAT was abolished on e-publications and women’s sanitary products, a plastic packaging charge was introduced as was postponed accounting for import VAT. There were a number of other less significant changes.

Tom Kivlehan - Partner and Head of Indirect Taxes
Tom focuses on pragmatic strategies for mitigating undue VAT and Duty costs and has particular experience of global supply chain issues having worked on global projects for several high profile organisations. Tom leads our Indirect Tax practice in the UK and sits on the BDO International Indirect Tax Steering Committee focusing on the service levels and requirements of global businesses.

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Introduction of postponed accounting for import VAT

From 1 January 2021 (i.e. after the end of the Brexit transition period), postponed accounting for VAT will apply to all imports of goods into the UK, including from the EU.

Currently, where a business brings goods into the UK from non-EU countries, it is generally required to pay import VAT at the time the goods arrive in the UK, before subsequently (on the next VAT return) reclaiming this from HMRC as input tax. Postponed accounting for import VAT will allow businesses bringing goods into the UK from both EU and non-EU countries to account for any import VAT due on their VAT return, thereby potentially providing a significant cash flow benefit.

The government recently confirmed that the policy easements put in place for a potential ‘no-deal’ Brexit would not be reintroduced, as businesses now have time to prepare. However, this Budget announcement clearly indicates that the specific policy easements in question do not include postponed accounting for import VAT. This would have created a real strain on cash flow for businesses bringing goods into the UK from the EU.

It is to be assumed that the Government will publish further guidance on postponed accounting for import VAT in due course. Any businesses that bring goods into the UK should keep abreast of related developments to ensure they are prepared to take advantage of this VAT easement.

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Abolition of VAT on digital publications

The government will introduce legislation to apply a zero rate of VAT to digital publications (“e-publications”) from 1 December 2020.

In the government’s view, the existing VAT zero rate for publications (books, newspapers, magazines, journals, etc.) is limited to printed matter (i.e. publications in hard copy). The new legislation will make it clear that e-books, e-newspapers, e-magazines, e-journals, etc. are entitled to the same VAT treatment as their physical counterparts.

As EU rules permit Member States to align their VAT rules for physical and e-publications, the government can make this change before the Brexit transition period ends on 31 December 2020. The government expects the publishing industry, including e-booksellers, to pass on the benefit of this VAT relief to consumers.

It will be interesting to see how this announcement impacts the ongoing VAT litigation involving News Corp UK & Ireland Ltd. The Upper Tribunal recently held that digital versions of newspapers published by News Corp were zero-rated under existing UK VAT law. The decision also indicated that VAT zero-rating should apply to any digital publication where the printed equivalent would be zero-rated.

HMRC subsequently confirmed its policy that the existing zero rate only applies to the sale of printed matter, and that supplies of e-publications are standard-rated. HMRC has since appealed the Upper Tribunal’s decision to the Court of Appeal.

These developments will potentially impact any organisations that buy in or make supplies of e-publications, ranging from publishers and media businesses to not-for-profit membership organisations that offer their members e-publications as a membership benefit.

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Abolition of VAT on women’s sanitary products

The current reduced (5%) rate of VAT on women’s sanitary products (also known as ‘the tampon tax’) will be abolished from 1 January 2021.

There has been a long-running campaign for women’s sanitary products to be zero-rated in line with the UK’s practice of zero-rating other ‘essential’ items such as food, children’s clothing and books. However, whilst all Member States currently have the discretion to apply a reduced rate of VAT of between 5% and 15%, the introduction of a new zero rate of VAT for women’s sanitary products would contravene EU VAT rules.

Consequently, the new zero rate can only take effect from 1 January 2021 (i.e. after the end of the Brexit transition period).

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Plastic Packaging Tax

From April 2022, a new Plastic Packaging Tax (PPT) will be introduced to incentivise the use of recycled plastic in packaging.

This measure was first announced at Budget 2017 with the aim of tackling single-use plastic waste. The policy objective is to provide a clear economic incentive for businesses to use recycled material in the production of plastic packaging, diverting plastic waste from landfill or incineration.

The PPT will apply to plastic packaging produced in or imported into the UK that does not contain at least 30% recycled plastic. A rate of £200 per tonne of plastic packaging will be applied if the packaging contains less than 30% recycled plastic. Imported plastic packaging will be liable to PPT, whether the packaging is unfilled or filled.

The Chancellor also announced in Budget 2020 the launch of a further consultation on the detailed design and implementation of the tax, which includes consideration of an exemption for certain types of medical packaging.

This measure will affect UK producers of plastic packaging, importers of plastic packaging, business customers of producers and importers of plastic packaging, and consumers who buy goods in plastic packaging in the UK. There will be an exemption for producers and importers of small amounts of plastic packaging to mitigate against disproportionate administrative burdens in comparison to the tax liability.

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Round-up of other Budget indirect tax announcements

The following is a summary of some of the other Budget 2020 announcements relating to indirect taxes.

VAT on Fund Management and Financial Services

As previously announced, the government is legislating to clarify when fund management services are exempt from VAT. This will include an extension of the existing exemption for the management of special investment funds to include defined contribution pension schemes.

In addition to this, the government has announced that it will set up an industry working group to review how Financial Services are treated for VAT purposes.

These will be welcome clarifications after years of ambiguity in the VAT treatment.

VAT Quick Fixes Directive

As previously announced, the government will introduce retrospective legislation that will apply to goods which are removed from a Member State on or after 1 January 2020. The rules will simplify the VAT treatment of intra-EU movements of call-off stock, allowing businesses to delay VAT accounting until the goods are effectively called-off.

Domestic VAT Reverse Charge for Building and Construction Services

As previously announced, the implementation of the VAT domestic reverse charge for building and construction services will be delayed until 1 October 2020. The measure is being introduced to help prevent VAT losses as a result of missing trader fraud.

Freeze in Indirect Tax Rates

There will be no immediate change in the following indirect tax rates:

  • VAT registration and deregistration thresholds will not change for 2 years from 1 April 2020
  • Aggregates levy in 2020/21
  • Carbon price support rate in 2021/22
  • Fuel duty
  • HGV vehicle excise duty will be frozen for 2020/21
  • Alcohol duty rates on beer, spirits, wine and cider will be frozen.

Increase in Indirect Tax Rates

The following indirect tax rates will be increased:

  • Gas rate under Climate Change Levy to increase for years 2022/23 and 2023/24
  • Air Passenger Duty rates will increase in line with inflation for 2021/22
  • Vehicle excise duty rates for cars, vans and motorcycles will increase in line with inflation from 1 April 2020, with the exception of zero-emission vehicles, which will be exempt from 1 April 2020
  • Tobacco duty rates will increase by inflation plus 2% until the end of this Parliament. The rate on hand-rolling tobacco will increase by inflation plus 6%. These changes will take place from 6pm on 11 March 2020

The gross gaming yield bandings for gaming duty will rise in line with inflation for accounting periods starting on or after 1 April 2020.

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