VAT & Coronavirus – our masked crusader, HMRC to the rescue!
The introduction of lockdown had a significant impact on businesses, in particular those in leisure and hospitality as there was no ability to earn revenue. No money coming in and the need to pay bills meant that many businesses would simply have been unable to continue, not that some have not been irreparably damaged, even with HMRC coming to the rescue. Of course the most important and helpful measure was the introduction of the Coronavirus Job Retention Scheme (CJRS), meaning that businesses could retain staff whilst we bunkered down, albeit there were still bills to pay and as such this was only one in a series of measures which were introduced.
From a VAT and Customs perspective, the Government introduced the following:
Deferral of VAT payments
This applied to VAT due to HMRC between 20 March and 30 June 2020. Whilst this assistance measure is now over, it should be noted that this was not a waiver of payment – the VAT is still due. There is likely to be pain ahead in this regard, i.e. the need to find the money by 31 March 2021. Time-to-pay arrangements may still need to be sought with HMRC. Helpfully HMRC did confirm that deferred payments would not incur penalties or interest.
This was clearly a helpful measure despite the need for some clarification on its application to the following:
- Payments on Account – it did apply to these ✓
- Import VAT payments – it didn’t originally but HMRC later confirmed that it did ✓
- Other payments due to HMRC (such as VAT assessments) – it didn’t apply to these ✗
- Non UK established businesses – it did apply ✓
It was difficult for HMRC to consider all of the issues and questions at the outset as this was understandably introduced at very short notice.
Time to pay
For those businesses genuinely unable to pay their VAT bills as a result of COVID-19, HMRC have been prepared to accept time to pay arrangements. As with deferral these will still have to be paid at some point. This measure will continue to be available and we hope that HMRC continue to understand that businesses will take quite some time to recover from the effects of the virus.
Expanding the zero rate of VAT
- As it became evident that large quantities of Personal Protective Equipment (PPE) would be needed, the Government introduced measures to zero rate the sale of PPE from 1 May 2020 to 31 October 2020.
- In line with the above assistance HMRC also introduced measures to remove VAT and Customs Duty on certain PPE imported from outside the EU over the same period.
And if you weren’t an avid gardener, HMRC helped those that preferred to stay indoors and indulge in a good book during lockdown and furlough. They brought forward the planned introduction of the zero rate of VAT for sales of e-books. This was originally intended for December 2020 and has now been effective since 1 May 2020. It is a permanent change. Anecdotally, it was designed to decrease the cost to the consumer but like the more recent 5% VAT measure for catering, it isn’t clear that the saving has actually been passed on by businesses.
Reduced rate of VAT
On 15 July 2020, as part of the Summer Budget, the Government introduced a 5% temporary reduced rate of VAT for hospitality, holiday accommodation and admissions to attractions to stimulate what could otherwise have been a decimated holiday season however the 20% returns on 12 January 2021. As with the zero rate of VAT on e-books it is not clear if the VAT saving will be passed on to the consumer.
The 5% has been greeted with open arms as you would expect, but there have been a number of questions and issues it has raised. These include:
Sales and accounting
- The need to consider how some, not necessarily all, sales made to a person can be recorded and invoiced correctly.
- The accounting system and how to adjust that to ensure the right amount of VAT is paid to HMRC.
- If a deposit was taken prior to the rate change, a business may, if it wishes, adjust the VAT accounted for on the deposit.
- But what about deposits taken prior to the rate going back up to 20%?There are differing rules depending on whether the supply is a one-off or ‘continuous’ (such as property rents) and each case needs to be considered.
- It is the charge for admission, not necessarily other types of charges within an attraction/fair that are subject to 5%.
- Sporting admissions are specifically excluded, although there is some doubt over admission charges to certain activities, such as ten-pin bowling and karting that may not be regarded by HMRC as sports. Then there is the question as to whether the charge is for admission or for participation.
- What is covered by “fair” and “similar cultural events” – There have been arguments in VAT terms as to what a cultural activity is – notably the British Film Institute case a few years ago. Cinema admissions are included in the list of entertainment activities benefiting from the 5%, but there will be a number of slightly unusual businesses out there that read the list and wonder whether they are covered. A telephone call with HMRC’s advice service will not protect them from a potential exposure if they are at all unsure; a written ruling would be needed.
- Will seemingly ancillary items/services provided with the admission also be at 5% VAT?
- No doubt some businesses will have thought about offering free alcoholic beverages and increasing the price of a meal (the latter only being subject to the 5% relief). But a gift of goods is a supply for VAT purposes. Any ideas to improve the ordinary VAT position really do need to be carefully considered with help from a VAT specialist.
Eat Out to Help Out
In conjunction with the reduced rate of VAT the Government introduced the Eat Out to Help Out scheme (EOHO) designed to encourage restaurant footfall on Mondays to Wednesdays during the month of August, offering a 50% discount to customers (up to £10 per person) on food and non-alcoholic drinks purchased in relevant premises. Whilst not technically a VAT scheme, care has been needed on the VAT treatment of such income as there has been a real possibility of getting it wrong.
The amount of subsidy to cover (up to) the £10 cost is part of the consideration for the meal and so it is still subject to VAT. VAT has not been the only issue. For example, a franchise may have allowed online bookings to eat in at its restaurants and yet the particular restaurant chosen may only allow a take away or drive through pick up, meaning that a discount has been given but that does not qualify for the Government subsidy.
Extension of soft-landing period for Making Tax Digital (MTD)
The deadline for all MTD (VAT registered) businesses to have full digital links in place was originally intended to be 1 October 2020, but this has been postponed to 1 April 2021.
Further extension of the Domestic Reverse Charge (DRC) for Construction
This is an anti-fraud measure in relation to the certain subcontractor services in the construction industry. Originally intended to be introduced on 1 October 2019 but extended to 1 October 2020, it has now been further extended to 1 March 2021 to allow businesses more time to prepare.
Making communication easier
HMRC’s approach to communication has always been a little behind the times shall we say, but thankfully COVID-19 has spurred them to move away from accepting voluntary disclosures by post and to instead allow email disclosures. This is a step change for HMRC and one which hopefully they will continue.
Let’s face it, HMRC’s response times prior to COVID-19 were not at all great and this declined further during lockdown. It is understandable in that HMRC said that they had shifted resources from the front line to dealing with the COVID-19 furlough scheme and other measures discussed above. But in a number of cases there continues to be a lack of any triage system at HMRC, i.e. a recognition of the urgency or necessity of a particular enquiry or claim.
Brexit – remember that?
The UK is currently in a transition period in relation to its exit from the EU with negotiations underway to try to agree a trade deal with the EU. During this time the UK is still bound by EU rules. This period expires on 31 December 2020. COVID-19 initially halted these discussions but the deadline to extend the transition period expired on 30 June 2020, therefore the UK will leave the EU and will no longer be bound by its rules on 1 January 2021, whether it agrees a trade deal or not. If it fails to agree a deal, the World Trade Organisation (WTO) rules will apply.
With only 4 months to go (and COVID-19 having shifted everyone’s attention away from this significant change) there is currently no indication that the UK are in a position to agree a deal. That could be further hampered by a second wave of COVID-19 and further lockdown. Whether there is a Free Trade Agreement (FTA) deal or not, planning needs to happen now as time is of the essence. There will be a formal import and export declaration process for goods to and from the EU to contend with. And even if there is an FTA, the rules around the origin of the goods will need to be understood as this will determine if the goods imported qualify for the duty relief.
A number of alcohol producers switched to providing hand sanitising gel in response to increased demand and lack of availability but there are very tight rules around the use of alcohol and in particular licensing requirements. HMRC relaxed these rules to some extent as well as giving priority to applications for licenses.
In addition, HMRC relaxed the rules around the requirement to supervise the destruction/ disposal of beer, wine or cider due to the social distancing rules.
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