Article:

Are you ready for 2021? Changes in VAT and other indirect taxes

13 January 2021

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, the publication of  HMRC’s revised view of the VAT treatment of compensation/termination payments.

We know that 2021 will yield 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:

Now  

​January 2021

1 March 2021

31 March 2021

April 2021

July 2021

Beyond 

Now: 

Compensatory/Termination payments

HMRC revised its guidance on the VAT treatment of early termination fees and similar compensation payments in 2020 and this is likely to be subject to further refinement in 2021.
HMRC states that this will impact anyone who charges their customers to withdraw from agreements, but the impact may be more extensive than this.

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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 the additional administration required in relation to sales and purchases of goods to/from the EU. Government grant support remains available and BDO is accredited to assist with this.
  • 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.

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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.

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Ahead of 31 March 2021: 

Repayments of deferred VAT

The government will give taxpayers that deferred VAT payments between 20 March 2020 and 30 June 2020 the option to spread their repayments over 11 monthly interest free payments. This means that VAT liabilities that were deferred will now need to be paid by 31 March 2022 at the latest.

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 opt-in process available in early 2021.

31 March 2021:

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 due to end with the normal 20% rate reinstated after this date.

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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, 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.

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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.

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Beyond: 

Online Sales Tax

In July 2020, the UK Government 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.

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Businesses should proactively monitor the situation and the potential impact upon them.

For further VAT advice – please contact the local member of our VAT team: 

Scotland – Pauline Davidson
Yorkshire and North East – Lyndon Firth
North West – Richard Hogg
Midlands – Mark Ellis
Reading – Glyn Woodhouse
Bristol – Johanna Vincent-Murphy
South East – Kamal Kataria
Southampton – Sarah Paul
London – Tom Kivlehan

Visit BDO’s dedicated VAT and Customs pages here.

Visit our Rethinking the region hub and read more guidance from BDO specialists in your area.

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