Indirect Tax - Budget 2023 Commentary

VAT - Budget 2023 Commentary

In the week of the Oscars where we had the film: “Everything, Everywhere, All at once”, sweep the board we found ourselves, by Wednesday, with the Chancellor’s “Everywhere, Enterprise; Employment; Education” – not quite the same in terms of a catchy title but as Indirect Tax professionals it did leave us thinking – “Is it Enough?”

From the VAT perspective  there was little to make the heart miss a beat – there are some changes to note certainly, but they are quite niche in terms of the sectors that they relate to. Other announcements, whilst useful, look at consultations and calls for evidence - so very much future planning.

For the “Everything, Everyday” Indirect Tax news – well, we weren’t expecting any change in the VAT registration threshold as that’s been fixed till the 31 March 2024. The news on the retention of the 5p Fuel Duty cut and freeze in fuel Duty for another 12 months, will be welcomed by commuters but we were hoping for changes to the VAT recovery rules for businesses on EV Charging costs. This is in the area of employees charging their vehicles at home, who are reimbursed by their employer through a mileage rate – but we’ll have to wait for that news clearly.

Specific sectors where VAT rules will see a more immediate change include for Pharmacists, where from the 1 May 2023 they will be able to extend the VAT exemption they apply to services covered under the medical provision by registered pharmacists. It’s important to note, however, that for any businesses the more VAT exempt supplies you make, the less potential VAT recovery on the cost of running your business you can benefit from. An issue for pharmacists to consider as they recode their income from May.

A plan to extend the zero rating on prescriptions to medicines supplied through Patient Group Directions, will be more welcome as the zero rate enables no VAT to be accounted for on the charge, but protects VAT recovery on associated costs.

Quite niche changes as noted.

The consultations announced; or continuing review processes which are ongoing; are in the areas of Finance – relating to Fund Management and the wider Financial Services market.

However, there was one new paper that did receive a warm welcome. This related to the consultation review of VAT Reliefs as they affect the provision of Energy Saving Materials.

Currently UK based suppliers (excluding those in NI) who installed specific qualifying energy saving materials, such as solar panel, air and ground source heat pumps and insulation – all of which need to be in relation to residential property – can zero rate these works. A real benefit to encourage us to look to install such items into our homes, but also a valuable benefit to social landlords such as housing associations, looking to improve the quality of social housing across the UK and drive down energy costs for tenants.

However, the list of qualifying items is quite narrow – doesn’t include double glazing or energy efficient lighting and doesn’t look at new and emerging technologies – hydrogen for example, to widen the relief from VAT as these new products reach the market.

There are nuances to the existing rules as well. Currently, if you install a new battery on your PV panels at a separate point after the installation of those panels, you’ll face a 20% VAT charge on top of the cost, as opposed to if you’d had the battery fitted at the same time the PV panels were installed.

The consultation opens up the discussion on this area, in terms of new items to include and the right to relief at a latter point. Also to be welcomed, is the question as to whether to return charitable use buildings back into the scope of the relief, alongside residential buildings.

This would bring the relief position back to where it was in 2013 when such buildings could benefit from the reliefs available at that time, and many charities, including Universities and Colleges, would look at this potential return with interest.

There’s further comment around the VAT treatment of Deposit Return Scheme for recycled drinks containers, which again, is legislation that is for a future date and currently plans to administer this scheme do look somewhat complicated. Outside of this, and plans to move the VAT refund scheme for the DIY Housebuilder claims to a digital process, to reduce the administration for claimants and HMRC – this Budget is a little light on fundamental changes to the complexities of VAT that exists in the real world.

VAT remains the 2^nd largest tax revenue source for the planned 2023/24 year ahead at £187bn of receipts – Income Tax leads the way with £268bn – and Corporation tax sits at less than half of the VAT level at £82bn.

Certainly, VAT remains a leading light in the “everywhere” category - if there were such a thing as tax Oscars – although it’s not in the “everything” and “all at once” realm – at the moment at least.

Sustainability and the environment

The Spring Budget saw the Chancellor introducing new funding for certain carbon capture and storage (‘CCS’) technologies, the reclassification of nuclear energy as sustainable, the extension of the Climate Change Agreement (CCA) scheme while freezing the rates of a number of environmental taxes.

Environmental taxation can, and in some parts of the world is, used extensively to nudge behaviour towards more sustainable activities in both business and domestic situations. The primary thrust of this year’s budget from an environmental point of view, has apparently been to leave environmental taxation relatively undisturbed, while promising to invest substantial sums into developing environmental technologies. The commitment to inject £20bn into the development of carbon capture, is unprecedented - even though a previous government set up a similar competition some 10 years ago, albeit for a smaller some of £1bn. Hopefully, this will help the UK become a leader in this technology.

Climate change levy (‘CCL’) is a carbon tax on energy commodities supplied for consumption in the UK and is part of the UK’s carbon price support mechanism.  Updating the UK’s green taxonomy to describe nuclear power as “environmentally sustainable” may result in the nuclear industry being able to access some financial incentives that would not otherwise be available but will not attract any beneficial treatment for CCL, given that exemptions for renewable source energy was withdrawn in 2015.

On the other hand, the scope for CCL relief will be improved by the two-year extension of the Climate Change Agreement Scheme re-announced by the Chancellor in this Budget. This scheme provides energy intensive businesses with CCL relief provided they become more energy efficient and meet targets set for them under the scheme. The extension of the scheme to include new applicants may, according to the Chancellor, lead to an additional £60M of tax relief arising from energy efficient measures.

Other environmental tax measures announced or confirmed in the Budget are likely to have minimal impact on businesses or individuals. These included:

• Increasing the rate of plastic packaging tax in line with CPI from 1st of April 2023;
• Increasing the rates of landfill tax in line with RPI from the 1st of April 2023;
• freezing the rate of aggregates levy for 2023-2024;
• increasing rates for air passenger duty in line with RPI for 2024 – 2025 (following a 50% cut in APD for domestic flights in 2023-2024).

Clearly the Chancellor has not sought to use the Budget to introduce any substantial developments in environmental taxation, in spite of an ongoing climate change emergency. Environmental lobbyists may be disappointed that an opportunity to enhance the tax system to further encourage and speed up investment in renewables and hydrogen, and better support energy efficiency, has not been taken. On the other hand, the non-tax announcements around CCS and CCAs are welcomed.

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