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Brexit: Export evidence when zero rating

This article summarises the zero rating export rules for businesses that have only ever traded with the EU before Brexit and may not be as well versed with the export paperwork requirements.

The rules for zero rating an export have not changed since Brexit.

HMRC requires zero rated exports to be supported with an array of documents and there is potential for businesses to get caught out, with the risk of penalties and VAT liabilities arising from such oversights.

Export evidence

For example: Marv’s Marvellous Mugs Ltd (MMM Ltd) is based in the UK and manufactures bespoke mugs for corporate customers in the UK and EU only. A new EU based business customer places a large order of mugs and arranges for the goods to be transported using their own freight agent.

The customer has arranged their own freight because they want to control the shipping process, ensuring their freight agent has the right documentation for delivery, etc.

Legislation

The above scenario is called an indirect export (HMRC Notice 703), the guidance suggests that MMM Ltd should charge VAT until the customer sends the documents needed to support zero rating, and then issue a credit note for the VAT once the customer sends the proof of export.

HMRC’s guidance refers to a basket of evidence that contains sufficient commercial evidence. Such evidence can include air and sea waybills, bills of laden, purchase order from freight agent/courier, other documents from the freight agent that show the customers’ name/address. The guidance also notes that with the exception of specific circumstances, vague assertions by a trader that they acted in good faith, is not sufficient to support zero rating on its own.

That evidence must be obtained within three months of the export, otherwise, the export becomes standard rated, and that evidence needs to be retained with the other business records.

If Marv’s Marvellous Mugs was responsible for the shipping, they would still need to ensure the freight agent supplies the appropriate paperwork and retain it within the business records. On a much smaller scale, a business that ships goods by a physical visit to the local Post office, they should obtain a proof of posting receipt from the post office counter, otherwise what proof does the trader have to show HMRC that the goods have been posted to the customer abroad?

The potential risks

If a business does not hold the evidence needed to support zero rating, HMRC will assess VAT at the standard rate. HMRC can assess for VAT for the duration that the evidence was not available and potentially charge interest for the period the business was not compliant.

Export evidence has been covered in the past, and this article is a reminder that in a post Brexit landscape, the importance of zero rated export evidence has not diminished. If anything, the importance has increased, as the export rules now apply to EU transactions.

Ready for a SEISS challenge: Penalties and claims

As coronavirus support undergoes HMRC scrutiny, this summarises the checks and possible sanctions accountants and their clients need to look out for when applying for the latest self-employed income support scheme grant (SEISS).

The Treasury has provided HMRC with substantial resources to recover wrongly claimed coronavirus support payments, expecting to recoup over a third of grants made.

HMRC has confirmed that it will involve agents when looking into clients’ SEISS claims, despite side-lining them when clients needed to claim SEISS.

Proving SEISS was validly claimed

Entitlement conditions have evolved with SEISS varying the evidential boxes to be ticked.

Conditions which must be met SEISS 1 SEISS 2 SEISS 3 SEISS 4
The qualifying period Up to 13 July 2020 From 14 July to 19 Oct 2020 1 Nov 2020 to 29 Jan 2021 1 Feb to 30 April 2021
Intention to continue to trade in the tax year 2021/2022 (SEISS 4) and 2020/2021 (SEISS 1-3) YES YES YES YES
Business has been adversely affected by coronavirus YES YES YES YES
Reduced activity, capacity or demand or temporarily unable to trade in qualifying period, compared with what could reasonably have been expected but for the adverse effect of coronavirus n/a n/a Sales reduced in qualifying period Sales reduced in qualifying period
Reasonable belief that the business will suffer a significant reduction in trading profits in a basis period in which the qualifying period falls because of reduced activity, capacity or demand due to coronavirus. n/a n/a  Significant reduction in trading profits over at least one whole basis period Significant reduction in trading profits over at least one whole basis period

What is meant by… ?

Business adversely affected

It also includes scaling down or temporarily stopping trading due to interrupted supply chains, fewer or no customers, staff unable to work or one or more contracts have been cancelled and the business tried to replace the lost work.

Isolation or caring responsibilities due to arrival in the UK are not valid adverse circumstances for SEISS, increasing the jeopardy of overseas travel this year.

Basis period in which the qualifying period falls

The qualifying period for SEISS 4 is 1 February to 30 April 2021 (and for SEISS 3 it was 1 November 2020 to 29 January 2021), but the basis period which must have a ‘significant reduction’ in trading profits depends what date accounts are made up to.

For many, the qualifying period may fall into two separate accounting years and, at the time of claiming, there must be a reasonable, honest belief that profits for at least one of those will suffer a significant reduction because of coronavirus. The significant reduction in profits must be for the basis period as a whole, not just the qualifying period, and it must be due to reduced sales – increased costs are not relevant for SEISS 3 and 4 claims.

Significant reduction

The Treasury and HMRC have declined to give any definition of “significant”, except to comment that it must be an honest assessment. It seems that a 30% reduction is definitely significant (based on the future SEISS 5 structure), but it may be argued that a smaller reduction is significant too, particularly if the claimant has no other source of income.

The percentage reduction is by comparison with what ‘would otherwise have reasonably been expected’, ie what profits were or could have been forecast to be if it were not for the pandemic.

Penalties and repayment of SEISS

HMRC has powers to assess overpaid SEISS even before 2020/21 tax returns are submitted, but otherwise SEISS wrongly claimed must be included on tax returns.

If a claimant didn’t know they were not entitled when the grant was received there will be no penalty, provided the grant has been repaid by 31 January 2022. At the other end of the scale, failure of a claimant to notify HMRC of a grant they knew they were not entitled to when received will be treated as deliberate and concealed for penalty purposes.

HMRC has a web page for anyone needing or choosing voluntarily to repay some or all of a SEISS claim.

Be prepared

There is scope for accountants to assist clients to collate adequate evidence at the time each claim was made showing the effect of the pandemic on trade, factors known at the time of the SEISS claim and a timeline of significant dates, including relevant school and childcare closures.

Perhaps the gold standard would be for accountants to keep evidence on file for each SEISS claim their clients have made, collected as part of the preparation of the 2020/21 tax returns at the latest.

Engagement terms

Before advising clients about SEISS, especially in relation to HMRC enquiries, advisers may wish to consider whether such work is covered by the terms of their engagement letters which will usually be restricted to advice on tax and accounting.

New tax year resolutions for individuals and smaller businesses

Covid-19 presents additional challenges for the new tax year, in particular for those who have lost income but also for the relative minority who have benefited from increased income.

Working from home? Claim deductions

This is an opportunity for employers and employees alike. An employee who works from home can claim a tax deduction of £6 per week (£26 per month) for the costs of using their home as a workplace without having to keep records of specific expenditure.

Alternatively the employer can pay the homeworker the allowance tax and NIC-free.

Any payment in excess of the fixed allowance is taxable unless it reimburses specific expenses deductible under the normal rules for employment expenses wholly, exclusively and necessarily incurred in the course of employment.

Higher rate taxpayers may make the most of gift aid

Gift aid for donations to charity is more flexible than some think. Tax relief can be claimed in the year the donation is made or carried back to the preceding year to reduce that year’s liability and possibly produce a repayment.

PAYE codes may contain adjustments for unpaid tax, deductions or other income, based on preceding years’ figures. The 2021/22 code may be incorrect if additional deductions will be due, or investment income has reduced or is likely to do so.

Make sure current codes are correct and include all claimable deductions.

Self assessment payments on account

The first 2020/21 self-assessment payment on account made on 31 January will have been based on 2019/20’s income and tax liability.

If the liability for 2020/21 can be expected to be lower a claim to reduce the payments on account can be made, not only reducing the July payment but also producing a repayment of the excess payment made in January.

Review company shares for negligible value claims

If a share’s value has become negligible that can produce a loss for CGT purposes.

Better still, if the company concerned is or was carrying on a trade eligible for the Enterprise Investment Scheme (EIS) and the shareholder subscribed for their shares they may be able to claim income tax relief for their loss. The shareholder does not have to have claimed EIS and if it can be established that the company’s value became negligible within the preceding two years the relief may be claimable for an earlier year.

A taxpayer who needs to sell shares to meet liabilities should consider crystallising losses as described above to set against gains on shares sold.

Above all, make sure that all capital losses in the year ended 5 April 2021 are identified and reported. Even if they are not going to be set off against gains for 2020/21 those losses need to be returned to be claimable against future gains.

Complete residential property acquisitions before the SDLT holiday ends

The SDLT temporary reduction in England, Wales and Northern Ireland applies to acquisitions of residential property before 30 September 2021. But the relief is lost if completion takes place after 30 September.

There is a limited relief for purchases where substantial performance of the contract happens before 31 July which is the end of the ‘initial temporary relief period’ and completion takes place before 30 September.

Purchasers need to be mindful that conveyances are taking longer to process and complete than usual and the 3% surcharge on additional residential property is not included in the temporary relief and so is still payable but may be reclaimed where the new property replaces a main residence that tis disposed of within three years of acquisition of the new property.

In Wales the land transaction tax (LTT) holiday has only been extended until 30 June.

Scotland did not extend its land and buildings transaction tax (LBTT) holiday which ended on 30 April.

Missed out on 2020’s Christmas party? Have a summer ball instead

The exemption for employee events may usually be referred to as the ‘Christmas party exemption’ but it applies to all regular events at which employees are entertained.

Employers were unable to hold in-person events in December 2020 but when lockdown rules permit they will be able to hold replacement events instead.

Many employers made the best of things with virtual events which HMRC agreed would fall within the exemption for 2020/21 but such events were a poor substitute for the real thing and entertainment venues would undoubtedly welcome the return of their customers for an event as soon as possible.

Another concern is that we are now in a new tax year so an employer holding last year’s party now, as well as the traditional December event will need to be mindful of the £150 per person limit which applies across all events in any tax year, not per event.

Strictly speaking adding an additional one-off event to the calendar after going virtual in 2020 could be problematic in that that would not fit the definition of an annual event so employers should seek the advice of HMRC before going ahead.

When an overseas VAT registration is required

Imagine your business is based in the UK and registered for VAT. You have the chance to make a quick profit on some goods that are stored in Ireland. You will buy them from an Irish business for £3,000 plus 23% Irish VAT of £690 and sell them for £5,000 to a private individual there – the goods never leave Ireland. What is the VAT position?

Three VAT myths

There are three important myths to dispel with this scenario:

Myth 1: Sales are less than the Irish registration threshold

You might think that Irish VAT is not relevant because the £5,000 sale is below the Irish registration threshold. You are wrong: an overseas business does not get a registration threshold in another country – only its own. The threshold for a non-Irish business making sales in Ireland is ‘nil’.

You might decide that Irish VAT is not an issue because you have no ‘fixed establishment’ or ‘business establishment’ in that country – in other words, no head office, warehouse or trading premises. This is also incorrect: VAT registration depends on whether a business is making taxable supplies of goods or services in a country – it doesn’t need to be established there.

Myth 3: Can claim the VAT paid to the seller from the Irish tax authorities  

You may conclude that you don’t need to register for Irish VAT but can still reclaim £690 VAT from the Irish tax authorities by submitting a 13th Directive claim; the system for a non-EU business to claim VAT paid in the EU. A successful 13th Directive claim would mean your profit is £2,000 – life is looking good.

Import of food

Jota Jota Alimentos Global SL is a food company based in Spain. For one particular shipment, goods purchased from South America came into the UK before going to Spain. The only reason for this arrangement was because it was the quickest transport route.

VAT of £8,456 was paid when the goods arrived in Tilbury and the company reclaimed this VAT from HMRC’s Overseas Repayment Unit, which was rejected. It was an 8th Directive EU claim, rather than 13th Directive non-EU claim, because it happened in 2018.

HMRC reasons for rejection

HMRC said that JJAG was “importing goods into the UK and then selling the goods on from the UK”. The correct outcome would have been for JJAG to register for UK VAT, claiming input tax on the import of the goods, and then making a zero-rated onward supply to its premises in Spain. The transfer of ‘own goods’ from one EU country to another is a ‘deemed supply’ under EU law.

The decision

I was surprised that the taxpayer won the case; the refund claim was correct and there was no need for JJAF to register for UK VAT. The judge concluded that the entry into and out of the UK was “no more than part of the transit arrangements in order to ensure fast delivery to JJAG in Spain”. The business was not making taxable supplies in the UK.

Irish tale

The circumstances in JJAG were very unusual, that is not the case for the Irish case study. There is only one correct outcome here; the UK business must register for Irish VAT and pay output tax of £934.95 on an Irish VAT return (£5,000 x 23/123) and claim input tax of £690 on the purchase of the goods. It has still made a healthy profit of £1,065.05.

It’s understood that 19 EU countries require a non-EU business to appoint a local tax representative if they register for VAT there, but fortunately Ireland is not one of them.

These issues are very relevant for many businesses in the post-Brexit world, especially when deciding if they need register for VAT in the EU or vice versa.

CJRS guidance from 1 May 2021

The new guidance includes how to calculate furlough pay for newly eligible employees who could not claim from 1 November 2020 but were reported on a Full Payment Submission by 2 March 2021. So a claim can be made for the first time for any period 1 May 2021 onwards.

Up to and including 30 June 2021 you can claim, and must pay the employee, 80% of their reference pay for the furloughed hours subject to the monthly, daily or weekly cap.

From 1 July 2021 the scheme will taper off, with employers making a 10% contribution to wages in July, and 20% in August and September. The employee though must still receive the full 80%. A worked example of a July 2021 claim showing the taper can be found here and in example 3.21 here.

Calculate how much you can claim

The key points from the new Calculate how much you can claim guidance are:

  • If you’re claiming for a full month then use the £2,500 monthly wage cap
  • If you’re claiming for any full weeks within a claim ie 1, 2 or 4 week pay frequencies, then use the £576.92 weekly wage cap
  • For any other pay frequency, or a claim length that isn’t exact weeks, use the following maximum day rates multiplied by the number of calendar days in the pay period: see example 3.1 here. The maximum day rates are:
    • £83.34 for April, June and September
    • £80.65 for May, July and August

You are reminded that if an employee has had a pay increase/decrease this will not affect the reference pay that is used to calculate the grant and which must be passed on to the employee.

The CJRS policy intention has always been to put the employee back on to the pay they were on pre-furlough. Any worked hours must be paid based on their current terms and conditions. Depending upon their eligibility their reference date is:

  • The last pay period on, or before, 19 March 2020 for those reported on RTI by this date so eligible from March 2020 even if not claimed for before 1.11.20
  • The last pay period on, or before, 30 October 2020 for those reported on RTI between 20 March 2020 and 30 October 2020 so eligible from 1 November 2020 onwards
  • The last pay period on, or before, 2 March 2021 for those newly eligible from 1 May 2021 see examples 2.7 and 3.4 here.  An employee is eligible from 1 May 2021 if they were reported by 2 March 2021 even if their first pay period was after that date see examples 2.3 and 3.8 here

For variable pay employees with a 19.3.20 reference date you must continue to calculate their usual wages as the higher of:

  • The average wages in 2019/20; or
  • The corresponding period in 2019 – the relevant year changed from March 2021 claims onwards to consider 2019 rather than 2020. If the employee didn’t work for you in the corresponding period in 2019 use the average in 2019/20 see examples 3.9 – 3.11 here

For variable pay employees with a 2.3.21 reference date calculate 80% of their average wages and usual hours from the date they started work for you until the day before they were first furloughed on or after 1 May 2021 see examples 2.14 and 3.16 here

Change in relation to statutory leave and wages for variable pay employees

For claim periods up to and including 30 April 2021 continue to count the wages and calendar days that the employee was not receiving normal pay due to being:

  • On sick leave and receiving only SSP
  • On any family related leave and receiving only statutory pay
  • Receiving less than full pay after SSP or a family-related statutory payment has expired (referred to as ‘reduced rate leave’ in the guidance and legislation)

For claim periods from 1 May 2021 onwards, discount the days and pay related to periods of sick, family-related leave or reduced-rate leave unless the only wages received during their reference period were for these kinds of leave in which case they will have to form the reference pay. See examples 3.14 and 3.17 here.

Statutory leave and fixed rate employees

For fixed rate employees, who have any hours on annual leave, sick leave or statutory leave in their reference pay period do not make any adjustment to their usual hours eg for someone who works 40 hours a week who has 10 hours of unpaid leave, their usualhours remain at 40 hours per week see example 2.5 here.

TUPE’d employees

For claim periods from 1 May 2021 for a variable pay employee who has a reference date of 19 March 20 or 30 October 20 you may need to include days of employment and wages paid by their previous employer.

Calculating usual hours – the roundings query

One area of confusion that has remained since the introduction of flexi-furlough last July is how to round usual hours. If the usual hours are being calculated for a whole claim period rather than an individual pay period within a calendar month then the usual hours are always rounded up – see example 2.3 here.

If the claim is for each weekly pay period in a calendar month the usual hours are rounded down see example 2 here.

VAT: New partial exemption concession

Partially exempt traders can apply for a retrospective special method, if they have been impacted by the pandemic restrictions. Some taxpayers could save thousands of pounds.

R&C Brief 04/21

Revenue and Customs Brief 04/21 concerning VAT and partial exemption is very complicated and verbose. Many readers will have given up the ghost by the end of the first paragraph! But HMRC is actually giving a great opportunity here, which might help many partly exempt businesses whose trading patterns have been badly affected by the coronavirus pandemic.

Here is a practical case study to explain things.

Gym and insurance

Sports Ltd has two activities – it operates a successful gym charging membership fees and also sells sports insurance, earning commission as a broker. Both activities trade from the same rented premises. The company is partly exempt because the insurance commission is VAT-exempt and the gym income is VATable. The insurance commission is 20% of total sales.

Partial exemption and input tax

The company has three major expenses that are subject to VAT:

  • rent on the premises
  • marketing costs for the insurance activity
  • equipment for the gym

The VAT treatment of two of these expenses is simple – the equipment wholly relates to the taxable gym, so input tax can be fully claimed. The marketing costs wholly relate to the exempt insurance activity so no input tax is claimed.

It is the rent that causes the challenge. This is an example of ‘residual input tax’ – a cost that relates to both taxable and exempt activities, and so input tax can be partly claimed.

Standard method

Sports Ltd is likely to use the standard method of calculation for partial exemption, the default position, where the residual input tax claimed each period is based on the following formula:

Input tax to claim = Taxable sales (excluding VAT)

Taxable sales (excluding VAT) + Exempt sales

The percentage is rounded up to the nearest whole number as long as total residual input tax is less than £400,000 per month on average, – 85.1% means you will claim 86%.

Without coronavirus, Sports Ltd would claim 80% of its residual input tax in a typical trading period.

Reduction in taxable sales

The impact of coronavirus has been massive on gyms and many other businesses because of local and national restrictions.

If Sports Ltd continues to sell insurance to customers, but has frozen gym membership subscriptions because of coronavirus lockdowns, its VAT position has changed dramatically. The 80% VATable income percentage is probably now 50% for the last 12 months. If annual rent is £200,000 plus £40,000 VAT, input tax claimed will have reduced from £32,000 to £20,000 with the standard method. This is clearly not fair.

Special method request – retrospective opportunity

HMRC has recognised situations like Sports Ltd and Brief 4/21 gives a business the chance to apply for a temporary special method of calculation without a lot of questions and delay. The method can be applied retrospectively from the time that coronavirus first took its toll.

The application must explain how coronavirus has affected the business trading. A special method is any method of calculation that is not the standard method.

Square footage?

Sports Ltd might consider a temporary special method based on square footage splits: how much of the premises is used for the gym and how much for the insurance activity? An estimate would be that an 80/20 split would probably be accurate.

Alternatively, it could request a method that introduces a notional turnover figure for taxable sales for weeks where the gym is closed because of lockdown, based on past turnover. The logic is that the costs haven’t gone away (landlords still want rent) so income must be included to balance the books.

Fair and reasonable

A taxpayer can propose any method that is fair and reasonable. Special methods must always be approved by HMRC and the taxpayer must certify that it is ‘fair and reasonable’ in terms of input tax recovery. When coronavirus restrictions have ended, taxpayers will revert to their previous method.

Standard method override

For larger partially exempt businesses, there is an extra twist to the tale where a standard method override calculation might be necessary. That is beyond the scope of this article but see VAT Notice 706, section 5. If the override adjustment gives a fair outcome, there will be no need to apply to HMRC for a temporary special method.

IR35 reform rolled out in the private sector from 6 April

Off-payroll working rules for clients, workers (contractors) and their intermediaries.

An intermediary will usually be the worker’s own personal service company, but could also be any of the following:

  • a partnership
  • a personal service company
  • an individual

The rules make sure that workers, who would have been an employee if they were providing their services directly to the client, pay broadly the same Income Tax and National Insurance contributions as employees. These rules are sometimes known as ‘IR35’.

The client is the organisation who is or will be receiving the services of a contractor. They may also be known as the engager, hirer or end client. The client will be responsible for determining if the off-payroll working rules apply.

Get help on the off-payroll working rules (IR35) with webinars, guidance and resources from HMRC.

You may be offered schemes that wrongly claim to get around the off-payroll working rules. Find out how to recognise tax avoidance schemes aimed at contractors and agency workers.

Who the rules apply to

You may be affected by these rules if you are:

  • a worker who provides their services through their intermediary
  • a client who receives services from a worker through their intermediary
  • an agency providing workers’ services through their intermediary

If the rules apply, Income Tax and employee National Insurance contributions must be deducted from fees and paid to HMRC. In addition, employer National Insurance contributions and Apprenticeship Levy, if applicable, must also be paid to HMRC.

You can use the Check Employment Status for Tax service to help you decide if the off-payroll working rules apply.

Employment status for tax purposes is whether a worker is employed or self-employed. It’s used to determine the taxes the worker and client need to pay.

When the rules apply

The rules apply if a worker provides their services to a client through an intermediary, but would be classed as an employee if they were contracted directly.

A contract for the purpose of the off-payroll working rules is a written, verbal or implied agreement between parties.

The off-payroll working rules apply on a contract-by-contract basis. A worker may have some contracts which fall within the off-payroll working rules and some which do not.

Before 6 April 2021

If you’re a worker and your client is in the public sector, it’s their responsibility to decide your employment status. You should be told of their decision.

If you’re a worker and your client is in the private sector, it’s your intermediary’s responsibility to decide your own employment status for each contract. The private sector includes third sector organisations, such as some charities.

From 6 April 2021

From 6 April 2021 the way the rules are applied will change.

All public sector authorities and medium and large-sized private sector clients will be responsible for deciding if the rules apply.

If a worker provides services to a small client in the private sector, the worker’s intermediary will remain responsible for deciding the worker’s employment status and if the rules apply.

Recovery Loan Scheme Launches on 6 April

A new government-backed loan scheme launched on 6 April to provide additional finance to those businesses that need it.

  • new loan scheme will provide further support to protect businesses and jobs
  • loans will include 80% government guarantee and interest rate cap
  • government has backed £75 billion of loans to date as part of unprecedented £350 billion wider support package

The Recovery Loan Scheme will ensure businesses continue to benefit from Government-guaranteed finance throughout 2021.

With non-essential retail and outdoor hospitality reopening from 12 April, Ministers have ensured that appropriate support is still available to businesses to protect jobs. From today, businesses – ranging from coffee shops and restaurants, to hairdressers and gyms – and can access loans varying in size from £25,000, up to a maximum of £10 million. Invoice and asset finance is available from £1,000.

The Chancellor of the Exchequer, Rishi Sunak, said:

“We have stopped at nothing to protect jobs and livelihoods throughout the pandemic and as the situation has evolved we have ensured that our support continues to meet business needs.

As we safely reopen parts of our economy, our new Recovery Loan Scheme will ensure that businesses continue to have access to the finance they need as we move out of this crisis.”

This is in addition to furlough being extended until 30 September, and the New Restart Grants scheme launched last week, providing funding of up to £18,000 to eligible businesses. The Government is also supplementing this with the Plan for Jobs, focused on protecting, supporting and creating jobs across the country through the Kickstart scheme, T-level and a National Careers Service.

The scheme, which was announced at budget and runs until 31 December 2021, will be administered by the British Business Bank, with loans available through a diverse network of accredited commercial lenders. 26 lenders have already been accredited for day one of the scheme, with more to come shortly, and the government will provide an 80% guarantee for all loans. Interest rates have been capped at 14.99% and are expected to be much lower than that in the vast majority of cases, and Ministers are urging lenders to ensure they keep rates down to help protect jobs. The Recovery Loan Scheme can be used as an additional loan on top of support received from the emergency schemes – such as the Bounce Back Loan Scheme and Coronavirus Business Interruption Loan Scheme – put into place last year.

So far, the government’s emergency loan schemes have supported more than £75 billion of finance for 1.6 million British businesses and this new scheme will build on that success. This is part of the government’s unprecedented £350 billion support package which has included paying millions of workers’ wages through the furlough scheme and generous grants and tax deferrals.

Business Secretary Kwasi Kwarteng said:

“We’re doing everything we can to back businesses as we carefully reopen our economy and recover our way of life.

The launch of our new Recovery Loan Scheme will provide businesses with a firm foundation on which to plan ahead, protect jobs and prepare for a safe reopening as we build back better from the pandemic.”

Reactions from business groups:

Rain Newton-Smith, CBI Chief Economist, said:

“The coronavirus loan schemes have provided a critical lifeline to businesses, and so its successor – the new Recovery Loan scheme – comes as a huge relief to firms.

These loans can be taken alongside existing COVID loans to help firms refinance, restructure and go for growth.

It’s vital support remains as restrictions relax and demand returns to normal, allowing businesses to recover, save jobs, and support for reopening.”

Commenting on the Recovery Loan scheme, Suren Thiru, Head of Economics at the BCC, said:

“Accessing finance remains crucial to the lifeblood of a business and so the launch of the Recovery Loan scheme is welcome. The new scheme can play a potentially pivotal role in supporting the recovery by getting credit flowing to the firms who most need it.

Chambers of Commerce will continue to work with government and the banks to ensure that businesses have the clarity they need to enable them to use the new scheme to help them return to growth.”

David Postings, Chief Executive of UK Finance, said:

“The banking and finance industry remains committed to supporting businesses of all sizes through the next phase of the pandemic response. As focus turns to economic recovery, we know that many firms are still facing uncertainty. The new Recovery Loan Scheme, alongside other commercial financial support, will help firms rebuild and invest for future growth.”

Five ways Brexit and DRC will impact VAT returns

VAT returns submitted for the March 2021 quarter will be very different for many businesses, due to the impact of Brexit and the new reverse charge rules for builders.

Businesses will need to take extra care before pressing the ‘send’ button to fire off their March 2021 VAT return to HMRC. The figures will be very different in many cases compared to the previous quarter.

Since that time, we have had both Brexit and the new domestic reverse charges (DRC) rules for the construction industry to deal with. Extra time spent reviewing systems and checking VAT codes on accounting software will be a sound investment of resources to ensure there are no major errors. Here is a step-by-step guide.

Step 1 – check there are zero entries in Boxes 2, 8 and 9

For a GB based business, Boxes 2, 8 and 9 of VAT returns will always have zero entries – see below about Northern Ireland.

These boxes were only relevant when the UK was a member of the EU, recognising that the VAT treatment of EU trading in goods was different to imports and exports from outside the EU. But since 1 January 2021, there is no longer any difference between EU and non-EU trading – therefore, check these boxes are zero.

The starting point is that John or his agent would hopefully have elected for postponed VAT accounting (PVA) when the goods arrived from France and were declared as an import.

No VAT is payable at the border and it will be accounted for by John in Box 1 and Box 4 of his March return with a reverse charge entry based on the value of the goods. The net value of the import is recorded as an input in Box 7. John’s entries in Boxes 1 and 4 will be based on postponed import VAT statements downloaded from HMRC’s Customs Declaration Service (CDS).

Step 3 – consider Northern Ireland trading

Northern Ireland is still part of the EU’s single market as far as goods are concerned, so acquisitions will still be made from EU countries, with entries in Boxes 2, 4, 7 and 9 for each acquisition.

Sales of goods to VAT registered customers in the EU will be recorded in both Box 6 and 8, the outputs box and the EU disposals box. But a business in Northern Ireland can also use PVA for non-EU imports, a welcome cash flow boost.

  • Reverse charge for builders

The new DRC system for the construction industry finally started on 1 March 2021. The DRC transfers the VAT payable on a sales invoice from the supplier to the customer.

Step 4 – code sales and purchase invoices correctly

The new rules affect both suppliers and customers of construction services. The correct coding of purchase and sales invoices should ensure that the correct VAT return boxes are completed:

Example

Plumber Pete has charged £500 for labour and £2,000 for materials on a ‘supply and fix’ job for Steve on 1 March 2021, which is standard rated and subject to the DRC.

John will charge £2,500 and no VAT on the invoice issued to Steve, recording the sale in Box 6 of his next return (outputs box). Steve will account for the VAT not charged by John in both his output tax and input tax boxes 1 and 4 (£500) and include the net amount of £2,500 in Box 7, the inputs box.

Step 5 – prepare for higher or lower VAT payments to HMRC

An important issue with DRC is its impact on the net amount of VAT payable or repayable in Box 5 – the deadline date to pay the March return is 7 May:

  • Suppliers: For a builder selling DRC services, there will be less output tax to declare, meaning either lower payments to HMRC or even repayments. If significant repayments will be the norm, it might be worthwhile to submit monthly returns;
  • Customers: For many builders receiving DRC services, their VAT payments will increase because they are no longer paying builders VAT. This will definitely apply if the onwards sales to their own customers are still subject to normal VAT rules. It is important to be ready for the higher payment due to HMRC.

Conclusion

Many businesses will only have a Brexit or DRC challenge to deal with in March – hopefully not both. It will be business as usual for many.

As a final tip, there are 1.1m voluntary registrations in the UK that will need to join the Making Tax Digital (MTD) regime for VAT periods starting after 1 April 2022.

According to HMRC, a quarter of these businesses are already signed up. Once the March 2021 return has been dealt with, it might be a good time for other businesses to follow suit and get ready for the compulsory starting date. Alternatively, perhaps deregistration might be an option to escape VAT completely?

Brexit: Postponed VAT accounting and VAT return

HMRC has updated its guidance relating to difficulties obtaining Monthly Postponed Import VAT Statements (MPIVS) which are needed to account for import VAT on VAT returns.

Import VAT

This article concerns itself with GB VAT registered businesses that are importing goods into the UK from anywhere in the world. Those goods, when they enter the UK, will be subject to import VAT.

Where the overseas supplier is registered for UK VAT, then the overseas supplier will be liable for the import VAT and the GB business would receive a normal GB VAT invoice from the supplier with GB VAT number and GB VAT is charged.

In most other situations when buying goods from the EU or the rest of the world, the supplier won’t be registered for GB VAT. In that case, the UK buyer will be liable for import VAT.

There are three options for dealing with the import VAT:

  1. Freight agent pays the duty/VAT to release the goods and then recharges the duty/VAT back to the buyer, plus an admin fee.

  2. Buyer has their own deferment account and freight agent uses the buyer’s deferment account to release the goods without payment and HMRC takes the duty/VAT by direct debit around 45 days later.

  3. Buyer is using Postponed Import VAT Account (PIVA) and instructs freight agent that PIVA is to be applied when goods enter the UK, goods are released with freight agent or buyer paying HMRC and buyer accounts for import VAT on their VAT return

All of the above are possible but require the buyer to communicate with the freight agent, so that they know what instructions to follow. If the buyer is not responsible for the shipping, then the buyer needs to ensure the supplier instructs the freight agent as to what basis import VAT will be settled.

Enrol for Postponed Import VAT Accounting

The first matter is to enrol for the service, but how to do so is not obvious. The link takes you to your government gateway login and once logged in, you proceed to answer the questions and then enrolment is achieved.

If the enrolment fails, it is usually because the address or postcode doesn’t match HMRC’s records, so check your VAT certificate to confirm the address and postcode.

It does not seem possible to log into your government gateway first, there is no menu link or “services you can add” option for postponed accounting, going via the special link first and then logging into the government gateway seems to be the only way to do this.

Once enrolled, HMRC will send a reminder email each month and the MPIVS will appear on your government gateway home page.

How to use postponed Import VAT Accounting

First, ensure the freight agent knows you want to use it, if they don’t know they will not necessarily default to using it, so avoid surprises by ensuring clear instructions given (to the supplier as well if they are arranging shipping).

Once a month, HMRC will produce your Monthly Postponed Import VAT Statement (MPIVS) which lists all the imports in the previous month, for example, imports in January will appear on the portal from the third week of February.

The MPIVS shows the import VAT that has been “postponed”, and this is declared in box 1 of the VAT return. The figure is also declared in box 4 of the VAT return so the effect of this is VAT neutral, the benefit to the business is no cashflow implications as the VAT is declared and reclaimed on the return. If the business is partially exempt, then box 4 will be subject to the partial exemption calculation. Box 7 (purchases excluding VAT) is populated with the net value of the goods.

VAT Groups

Entities within a VAT group may have their own GB EORI numbers. In such cases to produce a group VAT return may involve downloading the MPIVS from each VAT group entity, and combining them into a single VAT group return.

Estimated VAT

There may be occasions where the MPIVS are not available or VAT returns periods not aligned with MPIVS, HMRC does allow the import VAT to be estimated, but the figure should be corrected on the following VAT return once the correct amount is known.

Accounting records

The MPIVS should be downloaded from the portal and stored carefully, as they are your only record of the import VAT that has been postponed, without the MPIVS statement, your box 1 and 4 figures will not be correct.

The statements are only available online for six months, so it is important they are downloaded in a timely manner.

Certificates C79

The business may still receive forms C79, these are produced when import VAT is not postponed and instead, paid upon arrival by the freight agent or business’ own deferment account. A business may typically see some imports postponed/MPIVS and some imports paid by freight agent/C79.

Key message

Freight agents must be instructed so they know what to do. Enrolment into PVA and completing the VAT return is straight forward.

HMRC have stated that the first run of MPIVS (covering imports in January) may also include some earlier February imports. This is a glitch and businesses should only reclaim import VAT relating to January and include any February imports on the February VAT return.