Budget 2021 – VAT changes

Headline changes

No change to current VAT thresholds effectively extending the scope of UK VAT by dragging in more marginal businesses, but hospitality & tourism VAT cut to 5%, extended until 30 Sept 2021; then 12.5% till 30 April 2022

 

The Chancellor of the Exchequer, Rishi Sunak, has extending the VAT rate cut on hospitality and tourism from 20% to 5% until 30 Sep 2021; then 12.5% until 30 April 2022 (the original reduction had been extended in September 2020 from 13 Jan 2021 until 31 March 2021

The UK rate cut covers: Restaurants; cafes; pubs (excluding alcohol); hospitality; hotels; B&B's; home rental; caravan and tent sites; hot take away food; theatres; fairs; circuses; amusement parks; concerts; museums; zoos; cinemas; studio or factory tours; botanical gardens; exhibitions; and similar cultural events and facilities. 

The reduction only applies on entrance fees to the attractions listed; not other supplies provided during the visits such as souvenirs. However, if the goods are part of the admission fee and are incidental to the main supply, the whole supply is eligible for the temporary reduced rate.

Note: served alcoholic drinks will not benefit from the cut. It excludes entry into sporting events. The UK has already brought forward reduced VAT rate cuts for e-books.

Most European countries offer reduced rates on tourism and cultural serves; several have cut them further for the rest of this year to support the hard-hit sectors during COVID.

Hospitality covers: restaurants; cafes; entrance to tourism and cultural events; hotels and accommodation - including house rentals. 

Comment

The UK has one of the highest VAT rates on the tourism and entertainments sectors. Most other European countries have previously taken advantage of EU rules which allow reduced VAT rates on these services.

HMRC U-turns on contract termination fees

HMRC’s sudden change in VAT policy in Brief 12/2020 had retrospective effects and contradicted existing HMRC guidance. The policy has now been reversed.

 

HMRC announced a major chance of policy for the VAT treatment of termination fees and compensation payments on 2 September 2020, in Brief 12/2020, but it has now reversed that change and confirmed that the policy will be introduced “from a future date.”

First policy change

The key outcome of this policy change was that most termination fees and cancellation payments were deemed by HMRC to be VATable if they related to standard rated contracts, such as the fees paid by mobile phone users to cancel their contracts early. Those charges were previously accepted by everyone in the tax world as being outside the scope of VAT (no supply of goods or services), including in the guidance published in HMRC’s internal VAT manuals.

Unfair to be retrospective

HMRC stated that the policy change was to be retrospective. It expected businesses to go back four years and account for output tax on past fees. However, the latest announcement on 24 January 2021 has completely reversed the September version of Brief 12/2020, confirming that the new rules will be introduced in the future, ie no retrospective adjustments are needed.

In the introduction to the updated Brief 12/2020 HMRC says: “Revised guidance and a new HMRC Brief to explain what businesses need to do, will be issued shortly.”

Two choices

It would be an onerous task to go back five months to refund overcharged VAT to all customers – there might be a lot of them. This is not necessary, and the Brief 12/2020 confirms that a business can carry on treating cancellation fees as VATable.

But the business can also refund past VAT charged to customers if its previous policy (before 2 September 2020) was to treat such cancellation payments as outside the scope of VAT.

The choice here is straightforward: if your customers can claim input tax, there is no benefit in adjusting the VAT that has been charged. However, if the customers are private individuals, exempt or partly exempt businesses, or non-business organisations, a VAT credit will be welcome.

Unfair behaviour

It is noted that HMRC did not seem concerned that the retrospective change of policy contradicted the guidance given in its own internal manuals. When the Brief 12/2020 was issued, the department hastily withdrew the previous guidance and replaced it with the new interpretation.

Accountants and advisers frequently use these manuals to check HMRC’s interpretation of the legislation on key issues. The manuals include more detail and analysis than the VAT public notices, often supported by important case law.

Brexit – Place of supply of services

This article examines the rules for determining the place of supply of services for VAT purposes, highlighting where they have changed following the exit of the UK from the EU, and considers what the potential implications of those changes might be.

 

Although the VAT place of supply rules for services did not fundamentally change as a result of Brexit, the relevant legislation was extensively amended and the potential consequences for some businesses supplying services to the EU have changed.

Rules previously ensuring no VAT applied to services supplied outside the EU have been extended so that there will now be no VAT on supplies outside the UK. But although this may be, for many businesses, a welcome simplification it could also lead to additional VAT registration liabilities in different EU member states.

 

Basic Rule

VATA 1994, s. 7A states that a place of supply of services is to be treated as made:

(a)in the country in which the recipient belongs, if supplied to a relevant business person;

(b)otherwise, in the country in which the supplier belongs,

subject to Schedule 4A which contains the general and other exceptions to this rule based primarily on the nature of the service being supplied.

Determining the place of supply of services

In order to establish the place of supply for VAT purposes, therefore, three key pieces of information are required:

  • whether or not the recipient of the service (the customer) is a ‘relevant business person’;
  • where the recipient is located;
  • the precise nature of the service that is being provided.

The correct treatment, for VAT purposes, can only be identified when all three are fully understood.

‘Relevant business person’

The definition of a ‘relevant business person’ has changed substantially following the exit of the UK from the EU.

From 1 January 2021, a person is a ‘relevant business person’ in relation to a supply of services if:

(a) the person carries on a business; and

(b) the services are not received by the person wholly for private purposes,

whether or not the services are received in the course of business.

It therefore includes charities, local authorities or other government departments who may have both business and non-business activities.

There are no prescribed evidential requirements. Where appropriate, a valid VAT registration number does still appear to be the preferred option by HMRC, notwithstanding the removal of any reference to VAT registration in this new definition, but normal commercial evidence should also suffice.

In relation to whether the supplies are received for private purposes, HMRC have stated (in their new Notice 741A) that unless you have information to suggest the service is wholly for private use, you can presume your customer is in business if they provide you with their VAT number.

A supply to a relevant business person is often referred to as a B2B supply, whereas supplies that are not to a relevant business person (supplies to consumers) are known as B2C supplies.

Customer location

A relevant business person belongs in a particular country if they have a business establishment, or some other fixed establishment, in that country.

The term ‘fixed establishment’ is not defined in law but is, generally, taken to mean a place from where the activities of the organisation are carried out, with the necessary human and technical resources to make or receive the supply in question.

If a relevant business person has more than one business or fixed establishment they are treated, for these purposes, as belonging at the business or other fixed establishment most directly associated with the supply in question.

This is often, but not necessarily, the head office or place where the contracts are signed. If this produces an irrational result, however, other factors such as whether, as a result of signing the contract, another establishment directly benefits, may also be relevant.

A body corporate or other legal person, who is not a relevant business person, is treated as belonging in the country where it is established.

A person who is none of the above is treated as belonging in the country that is their usual place of residence or where they have a permanent address.

Nature of the supply

Under the basic rule, B2B supplies are treated as made where the recipient belongs, while B2C supplies are treated as made where the supplier belongs, unless they fall within one of the many exceptions set out in VATA 1994, Sch. 4A.

Businesses must, first, consider whether their services fall within any of the exceptions before, effectively, defaulting to the basic rule.

Detailed guidance is available on each of the exceptions but, essentially, the exceptions fall into the following broad categories

  1. Services treated as supplied where physically located or performed.

This can include services related to land, transport services, catering, some valuation services and services relating to cultural, educational or entertainment events.

  1. Services treated as supplied where they are used and enjoyed

These provisions have been extended, from 1 January 2021, to include all supplies outside of the UK rather than just those outside of the EU. Broadcasting, telecommunication and electronically supplied services fall into this category which can also include the hire of goods or means of transport and repairs to tangible property under a contract of insurance.

  1. B2C services treated as supplied where received

The B2C supply of intangible professional services set out in Sch. 4A, para. 16(2) was previously treated as supplied where received when they were supplied to a recipient outside the EU. From 1 January 2021 this has been extended so that no VAT will have to be charged on services made to recipients outside the UK.

Implications for businesses receiving supplies in the UK from overseas suppliers

Businesses receiving services deemed to be made in the UK from an overseas supplier not registered, or required to be registered, for UK VAT must still account for the VAT due on the supply under the reverse charge procedure. This has not changed as a result of leaving the EU.

Implications for businesses making B2C supplies in the EU

UK suppliers of B2C digital services, to customers in the EU, had previously been entitled to account for VAT under the MOSS scheme. From 1 January 2021 they have had to register for VAT in an EU member state and transfer to the non-union MOSS scheme or register for VAT in each EU member state in which a liability arose.

From 1 July 2021 the non-union MOSS scheme is to be extended to include all B2C supplies of services to customers in the EU. The non-union One Stop Shop (OSS) will allow UK suppliers to register electronically for VAT in one EU member state and declare, in a single OSS return, all eligible sales of services to customers in any of the member states.

Prior to 1 July, therefore, there is a risk that UK suppliers will be required to register for VAT in multiple member states, some also requiring the appointment of a fiscal representative, if they supply B2C services in the EU that fall outside the MOSS scheme. Unfortunately, the relevant rules are not uniformly applied across the EU and therefore suppliers will have to consider their own situation in relation to the particular member state in which they make such services.

Implications for businesses making B2B supplies to the EU

The situation is a little clearer for suppliers of B2B services. The reverse charge applies across the EU but, as noted previously, the place of supply rules may differ between member states, particularly in relation to the use and enjoyment provisions, leading to a mismatch of treatment that could ultimately result in a tax leak, or even double taxation in certain instances.

Conclusion

The place of supply rules for cross border services has not changed significantly as a result of leaving the EU. UK businesses may even benefit from bringing the treatment for supplies to customers in the EU in line with supplies to the rest of the world. For some businesses, however, the lack of certainty around interactions with the EU represents a considerable risk, at least in the short term, before the introduction of OSS from 1 July 2021.

 

Way forward

4 Eyes Ltd is the UK Member of a leading EU VAT network. Our partners throughout the member states will be pleased to assist your business with its VAT compliance obligations. Please call us if this is relevant to you.