Budget March 2020 – VAT commentary

Despite the range of calls for significant changes from the Chancellor in terms of VAT, there was little of real surprise in this first Budget by the new Chancellor Rishi Sunak today.

Voices across the construction sector had been calling for VAT rate cuts on areas from works on Listed Buildings; repairs to domestic dwellings and the inclusion of battery storage within the 5% VAT regime for Energy Saving Materials to assist the Green Energy sector.

Some may also have been hoping for a further delay on the implementation of the VAT Domestic Reverse Charge for Construction Services which had already been pushed back to 1 October 2020 but there was nothing in this Budget to give cause for optimism on that point.

Equally the range of recommendations from the Office of Tax Simplification (OTS) in respect of potential areas of VAT easement remain in the “pending” tray. There is the acknowledgement that engagement with various stakeholders will continue on issues such as the simplification of the Partial Exemption rules and on the complexities that operating the VAT rules under the Capital Goods Scheme brings.

The VAT registration threshold level – another area raised by the OTS as to the benefits of significantly raising or lowering it – remains frozen until 2022 at £85,000.

Already headlined was the abolition of VAT with effect from 1 January 2021, on women’s sanitary products – the “tampon tax” - as it’s become known. This is an example of how the UK will have – when outside of the EU - the ability to add items to the list of supplies which can be treated as Zero Rated for VAT. It’s an ability it would not have under current EU membership.

The question is – what other supplies could be removed from the VAT net in this way ? This has to be balanced by the economic or possibly “political” benefits of such a reduction in the VAT revenue that the Treasury would experience as a result. Equally there is the possibility for lower rates of VAT to be added to currently zero-rated supplies. There’ll be lots to watch out for in the VAT realm going forward.

Interestingly – in light of the decision of the EU to harmonize the VAT treatment to digital books as is applied to printed books, which the UK had not followed - there was news today that the zero rate would apply to e-publications from the 1 December 2020. That is news which will be welcomed across the educational sector in particular, where such VAT is a sticking cost, but we’ll need to ensure there are no hidden wrinkles in the definition of qualifying e-publications.

Any news of VAT easements for businesses today? In the context of the Brexit transition there was some good news certainly as the Budget confirmed that the VAT Postponed accounting regime would indeed be brought in to assist with the negative cashflow impact for those involved in importing goods from the EU post December 2020 into the UK. This will mean that a business that may have faced paying VAT at the time and point of entry of the goods into the UK, can now account for that VAT on its VAT return and therefore be in a neutral cashflow position by paying it over and claiming it back on the same VAT return.

Consultations abound outside of these areas and will cover:

• Potential approach to Duty- and Tax-Free goods after our departure from the EU
• The VAT and Excise treatment of goods crossing UK borders after EU exit transition ends
• VAT on Financial Services will have an industry working group established although we can expect legislation to clarify the VAT Exemption applying to Fund Management services this year
• Partial Exemption rules and the Capital Goods Scheme as already mentioned

For those in the Agricultural sector there are to be new entry and exit rules introduced for users of the VAT Agricultural Flat Rate Scheme, which is a VAT accounting scheme aimed to ease VAT administration in this sector.

A final point of note from this early scrutiny of the Budget announcements is the additional investment that the government is to make in compliance officers and new technology for HMRC. Staff numbers has been reducing in recent years it has to be acknowledged, but the addition of some 1300 staff combined with much needed investment in their technology infrastructure is to be welcomed. Hopefully a precursor to ensure prompter engagement for taxpayers and ourselves, as advisers, with HMRC for all those areas where VAT does get complicated.

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