Budget 2018: VAT and Indirect Tax
The Budget did not contain any major surprises on VAT, but a number of the measures being introduced are aimed at targeting specific loopholes or VAT avoidance. When HMRC has not been successful in litigation, or the potential litigation involved could be protracted and expensive, targeted measures can deal with matters swiftly.
VAT registration and deregistration limits
The VAT registration threshold, i.e. the threshold above which businesses are required to be VAT registered, will remain at the current level of £85,000 per annum for a further two years until 1 April 2022. Also, the deregistration threshold will remain at £83,000.In March 2018 the government called for evidence into options for potential reform, but no clear options were identified.
Businesses that are close to the VAT registration threshold should monitor this on a monthly basis and should also not forget that, from April 2019, being registered for VAT will also mean that there will be mandatory requirements to comply with the Making Tax Digital requirements for VAT.
VAT and fraud in labour provision in the construction sector
As announced in the Budget last Autumn, the government is to introduce a reverse charge mechanism with effect from 1 October 2019 to prevent VAT losses through so called “Missing Trader” fraud. The reverse charge will require the customer to self-account for the VAT instead of the supplier.
This is a targeted measure to prevent VAT being lost through VAT being collected by suppliers that go missing before accounting for it to HMRC. Reverse charge accounting measures have been introduced in a number of circumstances where HMRC has looked to tighten up the supply chain.
VAT and vouchers
Following consultation, the government intends to introduce legislation in the UK to implement the EU position in respect of VAT payable on vouchers. The legislation is intended to ensure that VAT is charged on what the customer actually pays, regardless of whether payment is with a voucher or some other means of payment.
This is a step towards modernising and harmonising the VAT treatment of vouchers. The aim is to provide clearer rules that separate a single purpose voucher like a book token, from a more complex gift voucher and set out how and when VAT should be accounted for in each case.
VAT and higher education
The government will amend VAT law to ensure continuity and a level playing field in respect of English higher education providers under the Higher Education Research Act 2017. The Act introduced a new regulatory framework for the provision of higher education and increases competition and student choices. The changes will allow those bodies that are registered with the Office for Students in the Approved (fee cap) category to treat their supplies of education as exempt from VAT.
This measure is to ensure that VAT does not become a barrier to the extension of education providers.
Alternative method of VAT collection – split payment
Following a consultation process that was undertaken from March to June this year, the government is considering introducing a split payment model for collecting VAT on sales made online by overseas sellers. The measure is looking at ways in which VAT could be extracted from the payment in real time and deposited with HMRC.
The increase in online shopping in recent years, with many goods sold to UK customers by overseas sellers, has been identified by the government as an area where the tax collection needs to be tightened up. An Industry Working Group is to be set up by HMRC to explore this with the relevant stakeholders.
Extending VAT grouping
The government is planning to introduce legislation in the 2018/19 Finance Act to extend the eligibility of VAT grouping to certain non-corporate entities. Currently, only corporate bodies can join a VAT group, so it may be possible in future that as long as the control criteria are met, partnerships may be able to be a member of a VAT group registration.
VAT grouping is a useful way to create VAT efficiencies, and allowing entities other than corporate bodies should prove to be a welcome measure.
Anti-avoidance measures: VAT groups
HMRC plans to issue guidance to amend the definition of a “bought in service” by a VAT group to ensure that UK VAT is accounted for. Also, the guidance will clarify HMRC’s “protection of the revenue” powers and the treatment of a UK Fixed Establishment. The guidance will come in on 1 April 2019.
The government is tightening up the rules for VAT groups where they may be part of a wider international set-up and the grouping has resulted in UK VAT not being accounted for.
Anti-avoidance measures: insurance companies
The government intends to introduce legislation to prevent insurance companies in the UK using associates located outside the EU to supply services to UK customers. Insurance is mainly an exempt supply for VAT purposes, which means a UK supplier would not be able to recover the VAT incurred on related expenditure. By routing the arrangements through a non-EU supplier (so called “looping”) the irrecoverable VAT can be avoided.
This is a targeted anti-avoidance measure being introduced following HMRC being unsuccessful in challenging these arrangements in the Courts.
Anti-avoidance measures: prepayments
The government intends to change the rules with effect from 1 March 2019 in respect of the VAT treatment of prepayments. This change will bring all prepayments for goods and services within the scope of VAT where customers have been charged VAT but have failed to collect what they have paid for and have not received a refund.
Where a payment is made but the supply does not take place because the customer does not exercise their right to take the items, then no supply is made. However, the government intends that the VAT element of that prepayment still be accounted for to HMRC.
Anti-avoidance measures: reduction in price
The government plans to introduce stricter rules with regard to how and when VAT adjustments are made following a reduction in the underlying price. This will require that a credit note is issued to the customers.
The aim of this measure is to ensure that no “windfall gain” is achieved in the event of a price reduction, which would also result in a reduction of the amount of VAT payable. The reduced VAT would either have to be refunded to the customer or accounted for to HMRC.