Welcome to this special Budget 2020 edition of Constable’s VAT Focus. In this version of our regular newsletter, we focus on the VAT related announcements from the Budget.
Rishi Sunak has delivered the first budget since the UK formally left the European Union. Prior to the budget, there was a significant amount of discussion around what, if any, action would be taken around VAT in the UK.
It was suggested by many commentators that a decrease in the VAT rate would be announced in order to encourage consumer spending in an effort to help businesses which are struggling as a result of the coronavirus. Coronavirus, or COVID-19, has already had a significant impact in international supply chains and it is anticipated that it will continue to have a significant economic effect with up to 20% of the UK’s working population potentially being off work at any given point during the pandemic.
However, no cut in the rate of VAT was announced and there is no change to the VAT registration and deregistration thresholds. However, there were two significant announcements which relate to VAT:
1. VAT on Electronic Publications
The recent Upper Tribunal decision in the case of News Corp UK & Ireland concluded that electronic editions of newspapers are zero-rated for VAT purposes. Our coverage of this case can be found here.
Following this decision, HMRC released Revenue & Customs Brief 1 (2020), announcing that, despite all of its guidance being incorrect (based on News Corp UK & Ireland), that it would not alter its position on the zero-rate for electronic publications, confirming that it still believed that supplies of digital publications were standard rated. The reason for this position was that HMRC had received permission to appeal the issue to the Court of Appeal.
However, it was announced today that, from 1 December 2020, VAT will be removed from electronic publications, levelling the playing field for consumers who previously had to bear a VAT cost in order to download an electronic version of a publication.
Constable Comment: This is a welcome change, albeit rather cynically framed as a “giveaway” when the Upper Tribunal has already set a legal precedent dictating that electronic publications are, and always should have been, zero-rated for VAT. Cynicism aside, this is a VAT measure which assists in the delivery of the Government’s green objectives and helps businesses and charities who produce both electronic and hard copies of their publications.
2. VAT on Sanitary Products
For a long time there has been a debate around whether it is fair to charge VAT on women’s sanitary products such as tampons and sanitary towels. It has been argued that this “tampon tax” unfairly penalised women.
Historically, VAT has been charged at a reduced rate of 5% on women’s sanitary products whilst the UK has been a member of the EU. Once the transition period is over (31 December 2020), the UK will have the freedom to deviate from the harmonised EU system of VAT. Whilst it was a member of the EU, the UK was not permitted to alter the rate of VAT on sanitary products.
It was confirmed today that VAT on sanitary products such as tampons and sanitary pads will be scrapped on 1 January 2021 and they will, instead, be zero-rated.
Constable Comment: This is another welcome change in the world of VAT. It is good to see the UK Government using its new freedom to control VAT regulation to affect positive and progressive social changes. The EU’s classification of tampons and sanitary towels as “luxury items” has seemed somewhat regressive for a long while now.
Aside from the announcement speech made, the supplementary documentation discusses other areas of VAT reform and comments on the Government’s plans for the future of VAT in the UK:
Postponed VAT Accounting
From 1 January 2021, Postponed Accounting for VAT will apply to all imports of goods, including from the EU. This will provide a cashflow benefit to UK businesses which are VAT registered and deal with imports of goods. This will also assist in larger international supply chains, within which the UK business is just one link in a chain.
Under Postponed Accounting, importers of goods do not pay import VAT at the point of importation, but instead declare the import VAT on their VAT returns. At the same time, the import VAT can be reclaimed in accordance with the normal recovery rate for the business, thus reducing, or neutralising, any cashflow effect.
Cross-Border Goods policy
The Government will launch an informal consultation, over Spring 2020, on the VAT and excise treatment of duty and tax-free goods carried by travellers for personal use crossing UK borders after the EU transition period has ended.
VAT on Financial Services
The Government will set up an industry working group to review how financial services are treated for VAT purposes.
VAT on Fund Management
As was announced earlier this month, the Government is currently in the process of legislating to provide a wider VAT exemption for the management of special investment funds.
VAT Partial Exemption
Following a recent call for evidence on the simplification of the VAT rules on partial exemption and the Capital good Scheme, the Government will continue to engage with stakeholders in relation to their responses and will publish a response in due course. When this is published, Constable VAT will report on the findings.
VAT Quick Fixes Directive
The EU recently introduced new measures called “quick fixes” which are aimed at simplifying the EU VAT system. These changes came into effect on 1 January 2020 and our coverage can be read here. The UK must continue to implement EU law during the transition period or face fines.
Therefore, as announced on 31 December 2019, the UK Government will introduce simplified rules for the VAT treatment of EU movements of call-off stock, allowing businesses to delay accounting for VAT until goods are “called off” by the customer. The measure has a retrospective element as it applies to goods removed from the EU to the UK on or after 1 January 2020.
VAT Agricultural Flat Rate Scheme (AFRS)
Following informal consultations with stakeholders in 2019, the Government will introduce new entry and exit rules for the AFRS. This could impact a small number of businesses in the agricultural sector who have opted to use this special scheme.
The following changes will be implemented from 1 January 2021:
- businesses can join the AFRS when their annual turnover for farming related activities is below £150,000
- businesses must notify HMRC once their annual turnover for farming related activities exceeds £230,000, to be deregistered from the scheme and register for VAT instead
- businesses with turnover that exceeds £85,000 for non-farming related activities will still be required to register for VAT and will be ineligible for the scheme.
If you would like to discuss the potential impacts on your business or charity then please do not hesitate to get in contact with Constable VAT. We will be happy to assist.
This newsletter is intended as a general guide to current VAT issues and is not intended to be a comprehensive statement of the law. No liability is accepted for the opinions it contains or for any errors or omissions. Constable VAT cannot accept responsibility for loss incurred by any person, company or entity as a result of acting, or failing to act, on any material in this newsletter. Specialist VAT advice should always be sought in relation to your particular circumstance.