Grow economy by encouraging firms to invest, says tax expert

Tony Medcalf, tax partner at MHA Moore and Smalley, looks ahead to the budget on March 3 and the measures the Chancellor could put in place to support business recovery from the Covid-19 pandemic.

If I could ask one thing of the chancellor for the upcoming budget it would be a focus on tax relief schemes which encourage businesses to expand by investing in their own productivity. I believe the government should prioritise putting measures in place to help the UK economy grow out of the current financial situation, which will in turn help generate more tax revenue.

Prompting companies to invest in their own productivity could be done through extending capital allowances, such as the Annual Investment Allowance, or giving businesses better access to money to help them make these investments.

This could be through government-backed funding initiatives but also by better incentivising shareholders to invest money into their business.

I would also like to see targeted tax relief for business investment into certain areas. There is a lot of speculation about how the government will support the creation of a series of freeports across the UK which it is likely to link to the ‘levelling up’ agenda.

We may also see further government support for Enterprise Zones, which benefit from enhanced capital allowances.

This year’s budget could see an increase in capital gains tax. We could also see new taxes based around how long an asset is owned.

Speculation is also circulating about increases to corporation tax. While I believe it is currently more important to introduce measures which prompt business growth, if raising corporation tax is firmly on the government’s agenda it may be sensible to do this now, rather than avoid raising taxes during an election year.

Fuel duty is often a point of discussion when the budget comes around, and an increase in fuel duty would not be unreasonable this year. With less people currently using their cars, the government may see this as an opportunity to raise rates without much immediate impact.

For more analysis and comment visit our Budget Hub.

Import VAT – Ways to Pay

Prior to the end of the Transition Period on 31 December 2020,  goods arriving in the UK from the EU were classed as acquisitions. From 1 January 2021, goods entering Great Britain (GB) and goods entering Northern Ireland (NI) from outside the EU are classed as imports, rather than acquisitions. Customs duty and import VAT may now be due when goods are imported into the UK. This importer of the goods is liable to pay these taxes and is identified by the EORI (Economic Operators Registration and Identification number) number entered on the import entry completed prior to the arrival of goods.  As a UK based business you will need either a GB or NI EORI number, as appropriate, to allow goods to be cleared by HMRC.

Import VAT

Paying for import VAT

There are now two options on how import VAT is declared and reclaimed.

1) C79 – The C79 is the document issued by HMRC as evidence of the amount of import VAT paid in the preceding month. It is generated using your EORI. If you are the owner of the goods and entitled to recover VAT, you will use the C79 as evidence to recover the VAT paid to HMRC. HMRC will send you a C79 certificate in the post. This can take several weeks to arrive. The C79 should be retained within your VAT records as evidence of any input tax reclaim.

As you will have paid the import VAT and then must wait for the C79 to be received, this option will have cashflow implications.

2) Postponed VAT Accounting (PVA) – When PVA was originally announced in 2018, it was envisioned to be a temporary measure for 6 months in the event of “no deal Brexit”, but it is now a permanent measure.

As the importer of the goods, you will inform your Customs agent that you will be using PVA. To do this, your Customs agent will include CODE G at box 47e ‘Method of payment’ onthe customs form C88

When the goods are released, no import VAT will be charged. You will instead declare and reclaim the import VAT on your next VAT return.

You will need to register to receive PVA monthly statements. To register, you will require your Government Gateway user ID and password which is linked to your UK EORI number. The link below takes you to the Government Gateway to start the process of applying for monthly statements https://www.gov.uk/guidance/get-your-postponed-import-vat-statement. The monthly statements are not sent to you automatically, so should be retrieved each month. They are accessible for only 6 months, you should save/print these statements and retain them as part of your VAT records.

The statement will be available in the first half of the month and will provide import VAT information from the previous month.

On the VAT return covering the period in which the goods were imported, you should review the PVA monthly statements and enter the total import VAT for the period within box 1 and the net costs in box 7. You should also enter the amount of VAT you are entitled to reclaim on the import of goods in box 4.  

The PVA provides a cashflow advantage in comparison to the payment of VAT at import and later recovery by using the C79 issued by HMRC.

If you would like to discuss this further, please get in touch with our indirect tax partner, Jonathan Main on 01772 821 021 or email jonathan.main@mooreandsmalley.co.uk

Post Brexit – Changes to the VAT Return

Background

On 31 December 2020, HMRC updated numerous VAT notices to help businesses prepare for the end of the Transition Period and our departure from the EU Single Market and Customs Union. One of the VAT notices updated by HMRC was 700/12 (How to fill in and submit your VAT Return). The updated guidance is summarised below and will of course also impact the VAT codes you use in accounting platforms such as QuickBooks, Xero or Sage. You can find further guidance on the VAT codes on their respective websites.

Changes to VAT Return

Terminology

The most significant change from 1 January relates to the movement of goods between Great Britain (GB) and the European Union (EU), and the additional issues associated with the treatment of Northern Ireland (NI) as a territory within both the UK and the EU. The table below summarises these changes.

Postponed VAT Accounting and C79

For goods imported into GB and goods imported into NI from outside the EU, there are changes to the way a business can decide to account for and pay import VAT.  You can find further information here. 

VAT return boxes

There have been changes to the box titles on the UK VAT return. Although the VAT return retains its nine boxes, the transactions that are included within these boxes for supplies taking place after 31 December 2020 have changed. The precise nature of the changes also depends on whether the VAT registration includes business operations in NI.  

Box 1 VAT due in the period on sales and other outputs

You should continue to include any VAT due to HMRC in box 1 of the VAT return. If you decide to utilise the cashflow benefit of Postponed VAT Accounting (PVA), the import VAT payable should be declared in box 1. Supplies of services within the reverse charge will continue to be declared in box 1.

Box 2 VAT due in the period on acquisitions of goods made in NI from EU Member States

From 1 January 2021, the only acquisitions you include in box 2 are acquisitions of goods from the EU to NI.

Box 3 total VAT due

This box will continue to be the total of boxes 1 and 2.

Box 4 VAT reclaimed in the period on purchases and other inputs (including acquisitions from the EU)

VAT to be reclaimed as input tax will continue to be entered in box 4. If you are declaring import VAT via PVA, you will also reclaim the import VAT on the same VAT return via box 4, to the extent your business is entitled to recover this VAT. If you are reclaiming import VAT using a C79 (the import VAT certificate issued by HMRC) , you will enter the import VAT amount stated on the C79 once received. Supplies of services within the reverse charge will continue to be reclaimed in box 4, again to the extent your business is entitled to recover this VAT.

Box 5 net VAT to pay to HMRC or reclaim

This box will continue to calculate the difference between boxes 3 and 4 to determine if a payment is due to or repayment is due from HMRC.

Box 6 total value of sales and all other outputs excluding any VAT

The net value of all supplies of goods and services should be included in box 6. This includes supplies of goods and/or services to both business customers and private individuals outside the UK.

Box 7 the total value of purchases and all other inputs excluding any VAT

The net value of all purchases of goods and/or services should be included in box 7. This includes reverse charge transactions.

Box 8 For all supplies of goods and related costs, excluding any VAT, to EU Member States made on or before 31 December 2020

Any supplies of goods up to 31 December 2020 by a UK business will be declared in box 8 and supplies of goods to EU business will be also declared on the EC sales list. Any supplies of goods by a GB business to the EU from 1 January 2021 will no longer be declared within box 8 and there is no longer a requirement to complete an EC sales list.

For supplies of goods and related costs, excluding any VAT, from NI to EU Member States made from 1 January 2021

From 1 January 2021, you will only enter the net amount in box 8 if you are a trading in NI and supply goods to EU Member States. Figures in this box must also be entered in box 6. You will also be required to complete an EC sales list.

Box 9 For acquisitions of goods and related costs, excluding any VAT, from EU Member States made on or before 31 December 2020

This will include the net cost of EU acquisitions (purchases) by a UK business up to 31 December 2020. Purchases of goods from outside GB will no longer be classed as acquisitions  after 31 December 2020 and will not be declared in box 8.

For acquisitions of goods and related costs, excluding any VAT, from EU Member States to NI made from 1st January 2021.

From 1 January 2021, only acquisitions of goods from an EU Member State into NI will be entered in box 9. Figures in this box must also be entered in box 7.

Accounting systems VAT codes One of the most common questions from clients is what VAT code should be used on accounting systems like Xero, Sage and QuickBooks for sales of goods and services into and outside of the UK. Accounting systems have recently released updates detailing what codes should be input into systems for supplies of goods and services on or after 1 January 2021.

If you would like to discuss this further, please get in touch with our indirect tax partner, Jonathan Main on 01772 821 021 or email jonathan.main@mooreandsmalley.co.uk

Essential tax planning guide for individuals, corporates and SMEs

Our national tax team have worked together to create a handy Year End Tax Planning Guide, which is available for you to download for FREE. The guide is for individuals and companies and summarises some key tax and financial planning tips.

As we approach the end of the tax year, now is the time to review your tax affairs to ensure that you have taken advantage of all reliefs available to you and have considered some planning opportunities to help reduce your tax bill.

The guide covers the following topics:

  • Brexit Planning
  • Income Tax
  • Capital Gains Tax
  • Tax Favoured Investments
  • Property Investment Businesses
  • Inheritance Tax
  • Pensions
  • Corporation Tax
  • Capital Allowances
  • Enhanced Tax Reliefs
  • Making Tax Digital
  • Scottish Taxes
  • Welsh Taxes
  • Northern Irish Taxes
  • Republic of Ireland Taxes

Get in touch

If you have any questions about any of the topics raised in the guide or if you would like some advice about your year end tax planning, please get in touch with a member of the tax team.

VAT, early termination and dilapidations payments – impact on leases

In September 2020, when Brexit seemed a distant event and we were still able to eat out at our favourite restaurant, HMRC released Revenue & Customs Brief (“RCB”) 12 (2020) titled “VAT early termination fees and compensation payments”. It followed two judgements of the Court of Justice of the European Union (CJEU). In these decisions, the CJEU held that when customers are charged to withdraw from agreements to receive goods or services, these “termination fees” are considered as further payment for the supply of goods or services to the customer. The fact that payments may be categorised as contractual penalties or compensation under national law was irrelevant. It follows that most early termination and cancellation fees are liable for VAT. The reason why this is significant is because HMRC had previously accepted that these charges were not in respect of a supply and therefore were outside the scope of VAT.

HMRC has now announced that it is revising RCB 12 (2020) and this revised guidance is expected shortly. HMRC have also confirmed that its guidance will be implemented from an as yet unspecified future date.

We understand that the revised RCB will, in broad terms, confirm that they consider that early termination and similar payments will be consideration for a supply if they form a cost component to the supplier of making the intended supply available or are broadly equivalent to what would have been charged for that supply. Where a charge is made which is provided for in a contract, but which is not directly linked to the intended supply, it will be outside the scope of VAT. However, we understand the RCB will specifically provide clarification in respect of dilapidations payments made under a contract for lease of a property, as detailed below.

These payments are further consideration for the supply where the work is to make good use permitted under the contract. There is a direct link between the payment and the supply, and there is reciprocity as the tenant has signed up to return the property in the condition they obtained it. If the tenant had gone beyond what was permitted under the contract then the charge to rectify this would be outside the scope. It would not be for the supply as the landlord had not agreed to the usage and so the necessary reciprocity would not exist.

Below are other examples of where VAT is likely to be applicable to payments.

  • The contract is terminated but there is a clause in the contract requiring the customer to pay the remaining fees.
  • There is no pre-existing right to terminate in the original contract for a taxable lease but both parties agree to a variation to the lease, setting out terms for early termination and a sum to be paid to the landlord as compensation.
  • Early upgrade fees are a type of early termination fee and are treated in the same way.
  • Lease agreements for moveable goods commonly include clauses that allow lessees to terminate early but to pay liquidated damages as a result. For example, vehicle finance leases that customers can cancel after an initial period of hire but, if so doing, must pay a termination fee to cover the loss of future rents.
  • It is also possible for leases and other agreements to terminate early if a particular event occurs such as the customer breaching the terms of the lessor or an associate business calling in receivers. Contracts may say such events cancel their terms or effectively allow the lessor to terminate as though there had been a breach and require a fee to compensate the lessor.

We await the revised guidance but, in the meantime, HMRC has confirmed that businesses can either:

  • continue to treat payments that fall within the RCB as further consideration for the contracted supply, or
  • go back to treating them as outside the scope of VAT, if that is how they treated them before the RCB was issued​.

Making Tax Digital for Income Tax

Making Tax Digital (MTD) was first talked about almost five years ago now by HMRC as they believe avoidable mistakes by the taxpayer is costing the Exchequer billions each year. In fact they have estimated this figure at £8.5 billion in the 2018/19 tax year alone.

MTD was originally meant to be introduced for Income Tax in April 2018 but due to the enormity of the challenge of ensuring there was access to suitable software for the taxpayer and development of HMRC’s back end systems this was indefinitely delayed. HMRC then moved their focus to MTD for VAT as VAT returns were already filed quarterly and a higher proportion of VAT registered business would already use software.

From April 2019 all VAT registered business with turnover greater than the £85,000 VAT threshold have been required comply with the VAT rules by keeping digital records and using software to submit their VAT returns.

Recently HMRC quietly announced the following plans for MTD:

  • To make MTD for Income Tax mandatory from 6April 2023 for businesses and landlords with turnover in excess of £10,000.
  • To mandate those business who are VAT registered but currently have turnover under the £85,000 threshold into the VAT regime from April 2022.

MTD for income tax will apply to the self-employed, partnerships and to those who receive income from property, with gross income from these sources combined above a threshold of £10,000. The draft legislation includes an exemption for the largest partnerships, defined as those with a turnover of more than £10m

Such businesses will be required to maintain their accounting records digitally in a software product or spreadsheet. Maintaining paper records will no longer meet the requirements of the tax legislation Information will have to be submitted quarterly to HMRC via the required digital platform and then finalise their tax position after the end of the tax year.

MHA Moore and Smalley offer a wide range of digital accounting solutions and support and training to our clients looking to change their accounting package, get more out of their current system or looking to install a computerised system for the first time.

For GP practices we are able to assist you to tailor your accounting software to ensure that it will be compatible for the MTD requirements and to ensure meaningful figures are available on a monthly or quarterly basis.

Contact us

If you require any advice regarding the above please get in touch with our Healthcare Services team on 01253 404404 | 01159 721050 or alternatively contact us here.

Could a one off wealth tax rebuild public finances?

We are all aware that the financial support the Government has given to businesses and individuals over the last nine months will have to be paid for.

Ways of increasing the tax raised to at least mitigate the effect of this spending are restricted by the “triple lock” promise. In the pre-election manifesto it was stated that there would be no increases to Income Tax, VAT or National Insurance during the life of this parliament. The government is no stranger to the U turn, but breaching this promise, even in extraordinary times, would not be easy.

A recent report on a proposed wealth tax aims to create a system for “sharing the burden of paying for the crisis across those with the broadest shoulders”. 

The Wealth Tax Commission issued its report on the rationale for, and design of, a Wealth Tax on 9 December 2020. The Commission is a self-appointed board of academics with no statutory authority or official role, but nonetheless, its report comes at a time when public expenditure is unprecedented during peacetime and cannot be wholly discounted.

However, in July 2020, only six months ago, Rishi Sunak said, quite unequivocally “I do not believe that now is the time, or ever would be the time, for a wealth tax”. He is unlikely to favour a tax which removes disposable income from the economy at a time when it needs as much stimulus as it can find.

The report considers using the tax to raise £250bn, taxing all individuals with wealth above £500,000 at 5% payable over 5 years – it is thought that this would involve 8.2 million individuals, representing about 25% of all taxpayers. Since there are only about 4.6 million who pay tax at higher rates, it would appear that about half those liable for a wealth tax would pay tax at the basic rate or indeed not be taxpayers at all. Whilst the affordability factor would affect everyone, it is likely to be particularly problematic for this cohort who might be ‘asset rich, cash poor’.

There are many anomalies in the design of the tax. In order for it to raise the required amounts, it would need to include pension rights in some way, but this raises a minefield of problems where fairness between occupational and personal pensions are concerned, or where pensions are already in payment.

Internationally wealth taxes have tended to be phased out in recent years since they are difficult to collect encourage avoidance and are deeply unpopular. A one-off wealth tax could ameliorate these concerns to some extent.

There is no current mechanism to assess the tax and it would take some time to make the necessary valuations and return mechanisms. Politically that might mean that implementation of the tax might come in at about the time of the next General Election.

Changing the rules for Capital Gains Tax (CGT) could raise significant amounts in the long term, and it bypasses many of the affordability arguments – in the vast majority of cases a liability for CGT arises precisely because funds have just become available.

CGT also falls outside the “triple lock” and has recently been reviewed by the Office for Tax Simplification, which found it to be in need of reform. We know that there will be a Spring Budget so those considering capital tax planning would do well to implement any planned measures before then. Raising CGT would not go very far in solving Sunak’s problems, but it could be his first step.