Spring Budget 2020 - VAT changes
There was a lot more than usual on VAT in this Budget. Partly this reflects our recent departure from the EU. Whatever one’s views on the wisdom of this, there is no doubting the resulting freedom (post 1 January 2021) to introduce our own rules without the constraints of needing to comply with EU law. Mostly the government plans to continue with the current regime, but over time the rules will start to diverge and the first signs of this are already apparent.
VAT changes of note were as follows:
Uncertain tax positions
An eye-catching announcement was that from April 2021, large businesses will be required to notify HMRC when they take a tax position which HMRC is likely to challenge. Apparently this policy will draw on international accounting standards and the government will consult shortly on the detail of the notification process. In practice a lot of large businesses will be engaging with HMRC in any event about any contentious filing positions they may have adopted, but this move seems likely to formalise this process and may increase pressure to notify issues that perhaps the business would otherwise have felt comfortable to simply take a view on (supported by external advice where necessary).
The key question here must be whether ultimately this will lead to more disputes, if HMRC continue to take ever more aggressive views on their interpretation of the law; more bureaucracy, as businesses introduce further governance regimes to ensure they are compliant; or a better, more transparent relationship between business and HMRC (which would be the hoped for outcome). Time will tell.
VAT on financial services
The government has announced it will set up an industry working group to review how financial services are treated for VAT purposes.
Unfashionable as it may be to say so, it would be great if the UK’s approach could be to look for ways to encourage the continued presence of international financial services in the UK. This would mean finding ways to avoid VAT inefficiencies and distortions, whether as a result of Brexit or more generally, to create a streamlined and efficient tax regime. The sector should be taxed fairly but the government should keep in mind the need to nurture one of the UK’s most economically valuable industries at this time of deep structural change. This would require a purposive approach which considers the policy reasons for exemption, rather than constantly seeking to narrow the scope of exemption and applying aggressive interpretations to e.g. VAT grouping rules, in the efforts to raise ever more tax from the financial services industry.
Following the failed attempt several years ago to agree the direction for an EU review of the vastly outdated VAT rules that apply across member states, the EU is also looking at this area, so it is vital that the UK gets this right.
VAT Partial Exemption
HMRC have been looking for a while at simplifying the complex rules on VAT recovery for businesses that make a mixture of taxable and exempt supplies . Following the recent call for evidence on the VAT rules on partial exemption and the capital goods scheme, the government has announced it will continue to engage with stakeholders and will publish a response in due course.
Future of Making Tax Digital
The MTD initiative has been big news over the last couple of years and continues to create major changes in VAT compliance practices across industry. A particular concern (especially amongst complex businesses with numerous systems all feeding into the VAT return) has been the requirement for digital links and what this will mean in practice, together with uncertainty as to the direction of travel for the future, which is still not clear. The government has promised to publish an evaluation of the introduction of Making Tax Digital for VAT, along with related research, which should make interesting reading.
VAT on fund management
As announced on 4 March, the government is legislating to clarify when fund management services are exempt from VAT. Following the mess of decisions at European Court of Justice level, this much-needed change is very welcome. Meanwhile, the government will undertake a general review of the UK’s funds regime during 2020. The review will consider the VAT treatment of fund management fees and other aspects of the UK’s funds regime, and will also look at direct tax and relevant areas of regulation, with a view to considering the case for policy changes. The review will begin with a consultation, on whether there are targeted and merited tax changes that could help to make the UK a more attractive location for companies used by funds to hold assets.
VAT on e-publications
The Government will introduce legislation to apply a zero rate of VAT to e-publications from 1 December 2020, to make it clear that e-books, e-newspapers, e-magazines and academic e-journals are entitled to the same VAT treatment as their physical counterparts. Meanwhile, HMRC continues to fight through the courts to restrict zero-rating for earlier periods. Have the policy makers thought this all through?
VAT Postponed Accounting
From 1 January 2021 postponed accounting for VAT will apply to all imports of goods, including from the EU. The government proclaims that this will provide an important boost to those VAT registered UK businesses which are integrated in international supply chains as they adapt to the UK’s position as an independent trading nation.
Abolition of tampon tax
From 1 January 2021 the government will use freedom from EU law to enable a zero rate of VAT to be charged on women’s sanitary products. This is nothing to get too excited about - it will save the average woman around £40 over her lifetime. However, it is an important point of principle for those who campaigned for Brexit and the UK’s right to determine these matters for itself.
Long-term passengers’ policy consultation
The government is publishing a consultation alongside Budget to gather views on the potential approach to duty- and tax-free goods policy after the transition period following the UK’s departure from the EU.
Long-term cross-border goods policy
The government announced it will launch an informal consultation over spring 2020 on the VAT and excise treatment of goods crossing UK borders after the EU exit transition period.
VAT Quick Fixes Directive
The government is also introducing legislation to introduce simplified rules for the VAT treatment of intra-EU movements of call-off stock, allowing businesses to delay accounting for VAT until the goods are called-off. The legislation will apply to goods which are removed from a Member State on or after 1 January 2020.
If you would like to discuss any aspect of this update, please contact Linda Adelson .
About the author
Linda Adelson is Rosetta Tax’s resident VAT expert, who has specialised in all aspects of VAT and indirect tax for over 25 years. One of just a handful of VAT solicitors in the UK, Linda is ranked by the Legal 500 as a Leading Individual for the depth of expertise in her field.
Find out more about Linda and our VAT advice and consultancy services for businesses.