2021 Budget: Indirect Tax
In the first Budget since the end of the Brexit transition period, the Chancellor has avoided the temptation to adjust the VAT system and instead has concentrated on the VAT COVID-19 relief measures as well as confirming several measures that have been announced previously.
Extension of the VAT reduced rate in the Hospitality and Leisure sector
On the 8 July 2020 the Government announced the reduction in the VAT rate to 5% for certain services in the hospitality and leisure sector, including catering and take-away services, hotel accommodation and admission to attractions. This reduction was to end on 31 March 2021, but will now be extended a further six month to 31 September 2021. Furthermore, a new reduced rate of VAT of 12.5% will be introduced from 1 October 2021 until 31 March 2022 which will again apply to those services before reverting back to 20%.
The extension of the temporary reduced rate will be welcomed by businesses in the hospitality and leisure sectors as it will help those businesses either with their margins, or potentially allow discounts to be made as the COVID-19 restrictions are eased. Businesses will be disappointed that the 5% will not be extended to 31 March 2022, but the new reduced rate of 12.5% will at least cushion the impact of the VAT rate increasing.
It is worth noting that many EU Member States operate a reduced rate of VAT for their hospitality sectors, so it will be interesting to see whether this new reduced rate will be extended beyond March 2022 to put UK businesses on a more equal footing with their EU counterparts.
COVID-19 VAT deferral legislation and penalty
As part of the COVID-19 relief measures the Government allowed businesses to defer VAT payments that were due between 20 March 2020 and 30 June 2020 until 31 March 2021. On the 24 September, the Government announced that a further scheme would be put in place allowing business to spread the deferred VAT over up to 11 monthly payments rather than making the full payment on or before 31 March 2021.
The Government has now formally legislated for this further deferral scheme and introduced a penalty charge of 5% of the outstanding deferred VAT for those business that have not paid the deferred VAT in full, opted into the new deferral scheme by the 30 June 2021 and made their first payment, or otherwise made an alternative arrangement to pay the deferred VAT.
Businesses can now opt in to this new deferred VAT payment scheme but must remember to do so by 30 June 2021 to prevent this new penalty from applying. It should also be noted that the first payment will be due when the business opts in to the scheme and the later the business opts in, the less instalments will be available (for example a business opting in in June 2021 will only be able to make 8 monthly payments rather than 11).
Amendments to the penalties for late submissions and late payments of VAT returns
The current penalty regime for the late submission and late payment of VAT returns (called the Default Surcharge Regime) will be replaced from 1 April 2022 by a points based system for the late submission and a set percentage penalty for late payment based on the period of time the payment was in default.
The current Default Surcharge Regime is a combined penalty for late payment and late submission which can result in excessive penalties where there has been no significant delay in the submissions of historic VAT returns or the payment of VAT. For example, a penalty of 15% can be levied if a payment is made one day late, even where all historic payments have been made on time, but the business has consistently submitted their VAT returns one day late.
These new penalty regimes will bring VAT in line with other taxes and will reduce the impact of late submissions of VAT returns while also preventing significant penalties from arising where payments are received one or two days after the deadline.
On the basis that late payment interest of 2.5% plus the Bank of England Base Rate will also be levied on late payments, this new penalty regime provides a more accurate basis for compensation to HMRC while also providing a disincentive to businesses to not pay on time.
Extension of Making Tax Digital
Making Tax Digital for VAT (“MTD”) applied for most businesses trading above the VAT registration threshold from April 2019. From April 2022, VAT registered businesses trading below the VAT registration threshold will also be caught by the MTD regulations meaning that they will need to keep digital records, submit their VAT returns digitally and have end-to-end digital links between software and the VAT returns.
This measure will affect very small businesses, many of whom will have manual records and processes and therefore, may need to invest in new systems and software to be compliant.
This measure also affects those businesses that, while not small, are not currently caught by MTD because they do not yet have any income (for example research and development or property development companies). Those business will also need to ensure they have compliant systems from April 2022.
Plastic packaging tax
As previously announced in the Budget 2018, the Government is introducing a tax of £200 per tonne on plastic packaging made of less than 30% recycled plastic. It has now been announced that this tax will take effect from 1 April 2022.
While we await the legislation to understand the scope of this tax and the definitions of “taxable product”, it is interesting to note that the tax will apply not only to the domestic manufacturers of plastic packaging, but also on the import of packaging that does not contain at least 30% recycled plastic. Therefore, it will be interesting to understand exactly how this tax will be levied and collected and how businesses not established in the UK will be registered for the tax.
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