Value Added Tax
For more than 20 years, the reduced VAT rate of 5% has applied to the supply by a trader of ‘installation of energy saving materials’ in some housing. There are a number of restrictions on how this relief operates, and the Court of Justice of the EU required the UK to narrow the scope of the tax relief because the UK’s version did not comply with EU law. The Chancellor has decided to take advantage of Brexit to reverse the changes required by the Court and to expand the scope of the relief to more energy-saving technologies. For a limited period, the relief will be further increased by making the supply zero-rated rather than reduced rated. These changes will take effect from April 2022. They are a more narrowly targeted tax cut than other measures in the Spring Statement, costed at £45 million in the first year.
The VAT registration and deregistration thresholds will remain frozen at their present levels of £85,000 and £83,000 until 31 March 2024. This will tend to require more businesses to register for the tax as they grow, and therefore represents a small tax- raising measure.
Making Tax Digital for VAT
For VAT periods commencing on or after 1 April 2022, all VAT-registered businesses, unless they claim a limited range of exemptions, are required
to comply with the requirements to maintain their VAT records digitally and file their VAT returns using MTD-compliant software. Up to this point, MTD has been compulsory for those trading above the VAT threshold of £85,000 in taxable turnover, but has been optional for those traders who have voluntarily registered. Anyone who is not yet registered for MTD should now take steps to join up as a matter of urgency.
Reduced rate for hospitality and entertainment
No further changes have been announced relating to the reduced rate of VAT that has applied to qualifying supplies by hospitality, leisure and entertainment businesses to help offset the impact of the pandemic. The rate reduced from 20% to 5% in July 2020, and increased to 12.5% with effect from 1 October 2021. It will revert back to the standard 20% rate on 1 April 2022.
There are no ‘anti-forestalling rules’ to counter the VAT saving enjoyed by someone who pays a deposit before the rate goes back up – that will lock in the 12.5% rate of VAT to the extent that a supply is paid for before 1 April 2022, even if the actual supply takes place later.
The rules for late payment of VAT will be reformed
for return periods beginning on or after 1 January 2023 (delayed from the intended introduction of the new rules on 1 April 2022). Default surcharge will be replaced by interest on late payment and separate penalties for late filing of returns. It is interesting to see this delay shown in the government’s accounting as a cost – implying that they believe the new system will raise more money than the old.