2020 Budget: Indirect Tax
Budget 2020 sees the first post Brexit adjustment to the VAT system in the abolition of the “tampon tax”. Following the end of the transition period, the UK Government will be free to amend the VAT system as they see fit and it will be interesting to see whether this is the beginning of an extension of VAT reliefs or merely a one off following extensive lobbying.
Zero-rating of VAT on Women’s Sanitary Products
With effect from 1 January 2021 women’s sanitary products will be subject to VAT at the zero-rate, removing the 5% rate that currently applies.
In a well publicised measure, the Government is removing VAT from women’s sanitary products (the so called “tampon tax”) which it is able to do once the Brexit transition period ends.
It is worth noting that since 2015, the VAT collected from the sale of women’s sanitary products has been allocated to the Tampon Tax Fund. This provides funding to charities and community groups helping women and girls facing issues such as domestic and sexual abuse and mental health. There has been no announcement whether the Government will replace this funding from other sources.
Zero-rating on Digital Publications
Currently, VAT at the standard rate of 20% is levied on digital publications, whereas an equivalent hard copy benefits from zero-rating. With effect from 1 December 2020, legislation will be introduced to align the two and allow zero-rating to apply to e-books, e-newspapers, e-magazines etc.
Rather than being a post Brexit relief, the EU has introduced rules allowing EU Member States to apply reduced rates or super reduced rates (such as zero-rating) to digital publications. Therefore, the UK is introducing a measure that has already been implemented in a number of other EU Member States.
In the recent decision of the Upper Tribunal in News Corp UK and lreland Ltd v the Commissioners for HMRC Revenue and Customs, it was ruled that the VAT treatment of e-newspapers should have always matched that of paper additions. Extending principles of that case to other e-publications would have achieved the same as the legislation that the Government is now introducing. However, HMRC have appealed that case, so while the Government clearly does not want VAT applying to e-publications going forward, HMRC do not want to pay out claims for historic overpayments of VAT. The appeal should be heard later in the year, so providers of e-publications and entities such as charities who have incurred VAT on the purchase of such publications should keep an eye out for the case.
Postponed VAT Accounting
As part of the “no-deal” Brexit preparations, the Government proposed the introduction of a postponed VAT accounting mechanism for imports into the UK. Under this measure, import VAT due on goods purchased from the EU and non-EU countries could be accounted for on the VAT return as a reverse charge, rather than paying the VAT and recovering it subsequently.
The Government has confirmed that this mechanism will apply from 1 January 2021.
Any measure that reduces the cash-flow burden for businesses is welcome and this measure puts the UK on the same footing as some other EU Member States in relation to imports.
VAT on Fund Management
The Government has announced that it will be introducing legislation to clarify when the exemption for fund management can apply. This measure will expand where the fund management exemption can apply for the management of investment funds. These measures will provide for the exemption to certain pension funds and closed-ended listed funds.
While exemption is generally welcomed, fund managers will need to consider the new legislation carefully, and determine the impact it may have on their ability to recover VAT.
Cross-border Goods Policy
The Government has confirmed that it will introduce legislation on the VAT treatment of “call-off stock” which is received from another EU Member State from 1 January 2020.
In addition, they have announced that they will be launching consultations on the indirect tax treatment for goods entering the UK following the end of the Brexit transition period.
The “call-off stock” measures were part of the four “VAT Quick Fixes” introduced by the EU, which should have been effective from the 1 January 2020. HMRC are catching up with EU legislative requirements that were delayed due to the Brexit negotiations, despite the fact they may only be operative until 31 December 2020.
Domestic Reverse Charge
The Government has confirmed that the introduction of the domestic reverse charge on construction services, initially announced in previous budgets, will be implemented with effect from 1 October 2020.
This measure was originally supposed to come into effect from 1 October 2019, but was delayed by twelve months in order to allow businesses time to adapt. Contractors should be preparing for this change which will likely require changes to systems and processes.
Financial Services, Partial Exemption and the Capital Goods Scheme
The Government has announced that an industry working group is being set up to review financial services and VAT.
Furthermore, following a call for evidence, HMRC are collating and reviewing responses on simplification measures to partial exemption and the VAT Capital Goods Scheme. The result of this will be published in due course.
Financial services, partial exemption and the Capital Goods Scheme are some of the most complex parts of the VAT legislation, creating cost and risk for businesses. Brexit provides the opportunity to review these rules and potentially simplify them without the need to align to the EU VAT rules and will be welcomed by business.
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