VAT Update – December 2023

Whilst there were no headline grabbing VAT elements to this year’s Autumn Statement, perhaps the most significant VAT change is the extension of VAT relief for the installation of energy saving materials. Alongside residential accommodation, the relief will now be extended to installations in buildings solely used for a relevant charitable purpose (RCP). RCP buildings are used by a charity solely for a non-business purpose or as a village hall or similar in providing social or recreational facilities for a local community. RCPs do not include charity headquarters where both business and non-business activities are carried out.

The scope of what are considered to be energy saving materials has also been widened to include additional technologies, such as water-source heat pumps. HMRC’s understanding is that most air conditioning units are air source heat pumps, however in cases of doubt, products will be treated depending on the facts of each case.

Until 1 April 2027 the zero rate of VAT applies to the installation of energy saving materials, at which time the applicable rate will revert back to 5% VAT unless there is an extension. The widening of scope as described will be implemented from 1 February 2024. Guidance from HMRC on the new measures is expected shortly.

Other notable VAT elements of the Autumn Statement:

• The zero rate for women’s sanitary products (replacing the reduced rate in January 2021) has been extended to reusable period underwear with effect from 1 January 2024. Retailers will still need to make the decision whether to pass the VAT saving onto the customer,
• VAT compliance obligations will be added to the Gross Payment Status (GPS) compliance test for the Construction Industry Scheme (CIS). This will give HMRC more power to remove GPS immediately in cases of fraud,
• Improved guidance from HMRC, designed to make it easier to report VAT errors,
• Government will consult in early 2024 on the VAT impacts of the High Court case Uber Brittania Ltd v Sefton MBC [QB-2022-001802] relating to the VAT treatment of private hire vehicles, self-employed drivers and third-party booking services, and
• Finally, the government will continue to consider representations from industry regarding the potential reinstatement of the VAT Retail Export Scheme.

Comments

We did not expect significant VAT announcements in the Autumn Statement.

That being said, it’s perhaps a missed opportunity that measures to widen the scope of the relief for the installation of energy saving materials haven’t made it easier for the relief to be accessed when the installation is part of wider property renovations. Currently, this area is problematic.

HMRC’s current position on it doesn’t make it easy for the relief to be applied when the legislators intended for such installations to become more attractive to residential property owners, by introducing the temporary zero rate. The measures will be welcomed by charities seeking to install energy saving materials into their qualifying properties.

For further details, please contact Nick Hart, VAT Director.

HMRC has recently contacted the Chartered Institute of Taxation (CIOT) and other stakeholders to confirm that they will be commencing with Their ‘One to Many’ campaign, aimed at businesses that have failed to submit one or more of its VAT returns. The campaign will involve letters being sent to businesses, with a copy to authorised VAT agents, informing them of their legal obligation to submit VAT returns, even if they have no VAT to pay. The letters will make businesses aware that in the absence of a submitted return, HMRC has the right to make an assessment for the VAT it estimates is due, and it will warn that penalties may also be issued where businesses fail to meet its VAT return deadlines.

Comments

Based on communication from HMRC, their aim for the campaign is to encourage timely submission of VAT returns, therefore reducing the number of outstanding returns and minimising the administrative burden associated with chasing and processing late submissions and issuing auto-assessments for estimated VAT due. Businesses with one or more late returns can therefore expect to receive a standard letter from HMRC asking them to ensure their VAT affairs are brought up to date with respect to filings.

Following the introduction of the new points-based VAT penalty regime that went live on 1 January 2023, we’re now seeing penalty points being issued by HMRC for returns not filed or paid on time. Points are still being issued when nil returns are due or even when the business is in a repayment position, but those returns are filed late. It’s recommended businesses do their utmost to implement clear and well-defined processes for preparing and submitting VAT returns on time.

If a business is no longer trading or is going through a period in which it has no reportable transactions on its VAT return, then deregistering from VAT is perhaps an option and further advice should be sought on this point.

Please contact Nick Hart, VAT Director for further details.

As a result of Basis Period reforms from the 2023-24 tax year, which standardise the tax year end for sole proprietors and partnerships, many of those affected are changing their accounting year-ends so that they tie in with the tax year-end to 31 March.

In doing so, and to ensure ease of balance sheet reconciliation, those changing their accounting year-ends are also considering changing their VAT accounting periods so that everything is aligned.

However, there are some considerations to keep in mind. The main point is around timing of the application to HMRC. A change in the VAT accounting period will not affect periods for which a VAT return has already been ‘issued’ (ie any returns showing under ‘View return deadlines’ on the HMRC online business tax account). One or more VAT returns may still need to be submitted under the current stagger before the change comes into effect.

For example, for a business on the Jan/Apr/Jul/Oct stagger who wishes to change its stagger to Mar/Jun/Sep/Dec, if the request is submitted after a return has been issued for the quarter ended (Q/E) 31 January 2024 (but before HMRC issues the Q/E 30 April 2024 return), we would expect a two-month return to be issued for the period 1 February 2024 to 31 March 2024. The business will still need to file the Q/E 31 January 2024 return. The next VAT return due would be for Q/E 30 June 2024, when the cycle would settle into the new quarterly stagger.

For businesses wanting a 31 March 2024 VAT Q/E, we strongly recommend applying to change the stagger early in January 2024 through the online process, rather than through the paper form, which takes a lot longer to process. The online application is made through the online business tax account, or by an authorised agent through their agent services account with HMRC. The change, when requested online, is generally approved within two weeks. If the change request still shows as pending after that time frame, we’d recommend contacting HMRC via the VAT Helpline to check on progress.

Businesses on Payments on Account would also need to be mindful of how a change in VAT stagger would impact the schedule of payments.

For businesses expecting large VAT repayments or having to make a large payment to HMRC further consideration to the timing of any stagger change should be had, to avoid any adverse impacts on cash flow.

Please get in touch with your usual Saffery contact if you’d like to discuss changing VAT accounting periods.

We’re aware of HMRC writing to businesses who use third-party payment processors with respect to VAT accounting. The key point is that where VAT is due, it’s accountable on the full value of the supply, and not on a value which is net of the payment processors’ fees. For example, where a supplier makes online sales totalling £6,000 inclusive of VAT at the standard rate, but receives £5,750 in cash via the payment processor which is net of their fees of £250, the VAT which the supplier needs to be accounted for on its supplies is £1,000 (1/6th of £6,000 based on a 20% VAT rate) and not £958.33 (1/6th of the cash amount received).

It would appear HMRC has grown concerned that suppliers using the services of third-party payment processors are not bringing the right of amount of VAT to account. The letters which HMRC is now sending out is urging businesses to check they’re accounting for VAT correctly and to correct any errors noted, in the appropriate manner.

It’s not clear what records HMRC is relying on when selecting which VAT registered businesses to write to concerning this matter.

Comments

Please get in touch if your business does receive a letter from HMRC regarding VAT accounting when payment processors are being used to facilitate payments by customers for orders placed. The use of such providers is prevalent in the e-commerce space, and the likes of Paypal and Stripe for example are commonly used by online sellers. Suppliers should ensure they have access to data which clearly indicates the gross value of supplies made, in order for the appropriate amount of VAT to be reported. Such data forms a vital element of the records a VAT registered business trading online, is required to keep.

For further details, please get in touch with Nick Hart, VAT Director.

The festive season is upon us and there’s often confusion at this time of year around the recoverability of VAT incurred on the cost of Christmas parties.

Meals and parties that employers put on for their employees are considered staff entertainment and the VAT incurred is recoverable (or partially recoverable if generally your VAT recovery is restricted under partial exemption or with respect to non-business activities undertaken). The input tax block which applies to the provision of entertainment doesn’t apply here.

Care must be taken however if such events are attended by non-employees (eg spouses, guests, clients) as well as employees. In these instances, an apportionment based on head count is appropriate with VAT only being reclaimed on the percentage of the costs which relate to the number of employees attending. The remainder of the VAT is not recoverable under the business entertainment rules.

If a Christmas event is being put on for the purpose of entertaining non-employees, the VAT is blocked from recovery even if a small number of employees attend for the purpose of helping to entertain the guests.

For further information on VAT recovery and entertainment, please get in touch with your usual Saffery contact for assistance.