Budget 2021 - Indirect Taxes

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VAT has been an important tool in the government’s response to COVID-19. The reduced rate of 5% for hospitality and tourism will remain for a further six months before rising to a still low 12.5% for the next six months.

The VAT threshold will remain unchanged from 2022 until 2024 and there were a few additional changes to indirect taxes that you find more about below.

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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Reduced VAT for Hospitality sector extended

The existing reduced rate of 5% VAT applied to certain supplies relating to hospitality, hotel and holiday accommodation, and admission to certain attractions was due to end on 31 March 2021.

The Chancellor has announced an extension to the temporary 5% rate of VAT until 30 September 2021. A new reduced rate of VAT of 12.5% will then be introduced from 1 October 2021 until 31 March 2022 after which the standard rate of VAT (20%) will apply. The scope of the scheme remains unchanged. For further information on the existing rules, see here

It will be critical for businesses to ensure that their systems are able to deal with the changes in VAT as they relate to the ‘time of supply’, especially in respect of advance payments such as holiday deposits. For a period, there will be four rates of VAT that carry a right of VAT recovery.

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VAT thresholds and Duties frozen

VAT thresholds

The Chancellor has announced that the VAT registration threshold will remain at £85,000 until at least 31 March 2024. The deregistration threshold will remain at £83,000 for the same period.

The Government estimates that maintaining the current threshold levels will result in approximately 9,400 additional small businesses having to register for VAT by the end of the 2022-23 financial year, and 19,400 businesses in total by the end of the 2023-24 financial year.

Clearly, there is potential for a different, possibly lower, threshold to apply from 2024. This is a matter that smaller businesses should keep in constant review.  For some businesses, there may also be overall VAT benefits from being VAT registered if trading below the threshold, and all businesses should undertake a cost/benefit analysis. 

Duties on fuel and alcohol 

The Chancellor has announced that fuel duty will be frozen in 2021/22. However, future fuel duty rates will be considered in the context of the UK’s commitment to reach net-zero emissions by 2050. There is a clear indication that fuel duty rates are likely to increase after March 2022 and all businesses should consider the potential benefits of switching to alternative fuel sources.

To further support the hospitality industry and its suppliers, the Chancellor has also announced that duty rates on beer, cider, wine and spirits will be frozen for the same 2021/22 period.

There is an existing increase in the excise duty rate for all tobacco products that took effect from 16 November 2020.

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Other indirect tax announcements

Deferred VAT due to COVID-19 and new penalty charge

HMRC has announced legislation on the VAT Deferral New Payment Scheme; a penalty of 5% of the amount of deferred VAT outstanding will apply if businesses have not paid in full, opted into the New Payment Scheme, or made an alternative arrangement to pay by 30 June 2021. 

This will impact businesses that took up the offer to defer VAT return payments due between 20 March 2020 and 30 June 2020, and who will not pay this bill in full by 31 March 2021.

HMRC has said that the normal Default Surcharge approach will not apply to deferred VAT.

Businesses will be able to: 

  • Settle the bill in full 
  • Opt for the New Payment Scheme and pay the bill over a period to 31 March 2022
  • Seek a ‘time to pay agreement’  

Clearly, HMRC is introducing a fixed penalty regime to encourage taxpayers to make arrangements. We recommend that all businesses review their options.

For more detail on the changes, see here

New points-based system for VAT penalties and interest

HMRC has announced that from April 2022, a new points-based penalty regime will be introduced to harmonise penalties and interest for taxpayers who fail to submit their VAT returns on time and pay the VAT due to HMRC.

The current default surcharge system will cease to apply from that date. Taxpayers will receive a point each time they miss a submission deadline for VAT and Income Tax Self-Assessment. A £200 penalty will be charged once a certain points threshold is reached. The threshold will depend on the taxpayer’s return submission frequency.

There would be no penalty for late payments within 15 days of the due date. Penalties will begin to be charged periodically thereafter based on the amount of tax outstanding. A 2% penalty will apply for late payments between 16 and 30 days, and 4% thereafter, on a daily basis. The penalty will stop accruing from the date a Time To Pay arrangement is agreed.

This is a substantial change to the existing regime and aligns the penalty and interest regime for VAT and Income Tax. We recommend that all businesses review their processes around compliance to avoid expensive penalties and interest charges.

Extension of Making Tax Digital for VAT

The existing Making Tax Digital (MTD) regime remains. However, from VAT periods starting on or after 1 April 2022, all remaining VAT registered businesses, including the self-employed and landlords, will be required to keep their VAT records digitally and provide their VAT return information to HMRC through MTD compatible software.

The Government believes that MTD will reduce errors and increase the tax take.

For help with MTD for VAT, see here.

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