For his first budget as Chancellor of the Exchequer, Rishi Sunak has delivered some interesting indirect tax changes.
In a post-Brexit measure that will be welcomed by UK businesses, with effect from 1 January 2021, the current system of payment at the port import VAT accounting will be replaced by postponed import VAT accounting.
The Budget also sees the introduction of two new zero rates – on e-publications and women’s sanitary products. For those following recent discussions, neither of these are particular surprises.
For Indirect Tax advisors, a new indirect tax is always of interest. From April 2022, a new Plastic Packaging Tax (PPT) will be introduced to incentivise the use of recycled plastic in packaging. Again, this is not a real surprise as it has been mooted since 2017.
Finally, the budget included a number of previously announced measures and the usual raft of rate freezes and changes.
Postponed Import VAT Accounting
Currently, where a business brings goods into the UK from non-EU countries, it is generally required to pay import VAT at the time the goods arrive in the UK, before reclaiming this from HMRC as input tax on the next VAT return, potentially up to three months later. When goods are brought from another EU member state, any VAT due was declared on the UK VAT return as acquisition tax and recovered on the same VAT return. With the current intra-community reporting ceasing at the end of the current Brexit transitional period, the requirement to account for import VAT on entry into the UK would have created significant cash flow issues for UK businesses.
Acknowledging this increased cost to businesses, the Chancellor has announced postponed accounting for import VAT. This will allow businesses bringing goods into the UK from both EU and non-EU countries to account for any import VAT due on their VAT return. This removes the additional potential cost whilst also providing a significant cash flow benefit for those businesses that deal with non-EU countries.
The requirement to self-account for import VAT is likely to require system changes for businesses to properly capture this VAT under Making Tax Digital. In the short term, businesses will be able to recycle their acquisition tax VAT codes.
VAT on digital publications
The government will introduce legislation to apply a zero rate of VAT to digital publications (“e-publications”) from 1 December 2020.
In the recent Newscorp Upper Tribunal litigation, HMRC had argued that the existing VAT zero rate for publications (books, newspapers, magazines, journals, etc.) is limited to printed matter (i.e. publications in hard copy). This position was rejected by the Upper Tribunal who indicated that VAT zero-rating should apply to any digital publication where the printed equivalent would be zero-rated.
The new legislation follows this approach and will make it clear that e-books, e-newspapers, e-magazines, e-journals, etc. are entitled to the same VAT treatment as their physical counterparts. As EU rules permit Member States to align their VAT rules for physical and e-publications, the government can make this change before the Brexit transition period ends on 31 December 2020.
These developments will not only impact organisations that make supplies of e-publications, such as publishers and media businesses; it will affect universities, colleges and other bodies who previously suffered a VAT cost on e-publications.
VAT on women’s sanitary products
The current reduced (5%) rate of VAT on women’s sanitary products (generally referred to as ‘the tampon tax’) will be abolished from 1 January 2021.
There has been a long-running campaign for women’s sanitary products to be zero-rated in line with the UK’s practice of zero-rating other ‘essential’ items such as food, children’s clothing and books. However, whilst all Member States currently have the discretion to apply a reduced rate of VAT of between 5% and 15%, the introduction of a new zero rate of VAT for women’s sanitary products would contravene EU VAT rules.
Consequently, the new zero rate can only take effect from 1 January 2021 after the end of the Brexit transition period.
Plastic Packaging Tax
From April 2022, a new Plastic Packaging Tax (PPT) will be introduced to incentivise the use of recycled plastic in packaging.
The PPT will apply to plastic packaging produced in or imported into the UK that does not contain at least 30% recycled plastic. A rate of £200 per tonne of plastic packaging will be applied if the packaging contains less than 30% recycled plastic. Imported plastic packaging, whether it is filled or empty, will also be liable to PPT. An exemption to the PPT will apply to small producers and importers. In addition, further exemptions, for example for medical packaging, are also likely to be introduced.
This measure will affect UK producers and importers of plastic packaging, as well as business and private consumers of those products.
Measures previously announced
The government has announced that it will set up an industry working group to review how Financial Services are treated for VAT purposes; including introduction of legislation to clarify when fund management services are exempt from VAT. Management of defined contribution pension schemes will be included in this exemption. These will be welcome clarifications after years of ambiguity in the VAT treatment.
The government will introduce retrospective legislation to implement the EU Quick Fixes into UK legislation. These revised rules will apply to goods which are removed from a Member State on or after 1 January 2020.
The VAT domestic reverse charge for building and construction services, which was postponed last year, will apply from 1 October 2020. The measure is being introduced to help prevent VAT losses as a result of missing trader fraud.
Indirect Tax Rates
There will be no immediate change in the following indirect tax rates:
- VAT registration and deregistration thresholds will not change for 2 years from 1 April 2020
- Aggregates levy in 2020/21
- Carbon price support rate in 2021/22
- Fuel duty
- HGV vehicle excise duty will be frozen for 2020/21
- Alcohol duty rates on beer, spirits, wine and cider will be frozen.
The following indirect tax rates will be increased:
- Gas rate under Climate Change Levy to increase for years 2022/23 and 2023/24
- Air Passenger Duty rates will increase in line with inflation for 2021/22
- Vehicle excise duty rates for cars, vans and motorcycles will increase in line with inflation from 1 April 2020, with the exception of zero-emission vehicles, which will be exempt from 1 April 2020
- Tobacco duty rates will increase by inflation plus 2% until the end of this Parliament. The rate on hand-rolling tobacco will increase by inflation plus 6%. These changes will take place from 6pm on 11 March 2020
- The gross gaming yield bandings for gaming duty will rise in line with inflation for accounting periods starting on or after 1 April 2020
There have been welcome measures in this year’s Budget. In particular, the introduction of postponed import VAT accounting is a welcome, and long overdue relief for businesses and brings the UK in line with many other economies.
Also very welcome is the first post Brexit VAT rate change. The abolition of VAT on women’s sanitary products will help prevent “period poverty” and is hopefully only the first of many new zero rates that address social and economic issues.
The zero rate on e-publications is a sensible measure and possibly a case of the Government jumping before it is pushed.
If you have any questions or concerns about the indirect tax measures introduced (or reintroduced in this year’s budget), please contact Alistair Duncan (email@example.com) or your usual AAB Contact.
By Alistair Duncan, Head of Indirect Tax.
For more information on Alistair and the Indirect Tax team, click here.
Download our summary of the key tax changes affecting individuals and businesses as announced in the Chancellor's speech yesterday here.
You can also click here to download our handy 2020/21 Tax Facts Guide.