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Basis periods to be abolished in 2022

Some unincorporated businesses will have bumper tax bills for 2022/23 as their accounts reporting is adjusted to fit exactly to the tax year from 6 April 2023, in preparation for MTD.

Draft legislation will be included in Finance Bill 2022 to abolish basis periods for businesses that pay income tax on profits calculated on a current year basis.

From 2022/23 those taxpayers will have to report to HMRC the income and expenses that arise precisely in the tax year – ie on an ‘tax year basis’. Losses will be those arising in the tax year.

Tax advisers with long memories will recall that on the introduction of self assessment in 1995/96, the basis for assessing income tax from unincorporated businesses was changed from the prior year basis (reporting accounts from periods ending in the previous tax year) to the current year basis (reporting accounts for periods ending in the current tax year).

MTD forces change

With the introduction of MTD for income tax from April 2023 (MTD ITSA), the reporting of accounting data is to be aligned exactly with the tax year.

Businesses which already draw up accounts to 31 March or 5 April will see no practical difference from 2022/23. Property letting businesses already have to report to the tax year, but in practice many draw up their accounts to 31 March, which by concession, is treated as a period ending on 5 April.

Why now?

Without this change to reporting periods taxpayers with several sources of income would need to file MTD reports for differing quarterly periods in the tax year, leading to up to 13 MTD filings required per year, plus VAT returns.

Under the tax-year basis the self-employed taxpayer will file MTD reports for all their sources of income by the same date each quarter, with a possible deviation for VAT if their VAT returns are not in the stagger one group (March, June, September and December quarter ends).

The estimated tax liabilities, based on those quarterly MTD reports, will also make more sense to the taxpayer, as the income reported in the quarter will be what drives the tax due for the year. HMRC has also recently consulted on accelerating tax payment dates for both companies and unincorporated businesses.

Who does this affect?

According to HMRC 93% of sole traders and 67% of trading partnerships already draw up accounts to the tax year or to 31 March. However, one third of partnerships do not, and it’s suspected this includes many very large and long-established partnerships such as law firms, accountants, doctors, dentists, and some farming businesses.

Businesses with a 30 April year end will be particularly hit in the transitional year (2022/23) as they will have to report profits for the period from 1 May 2021 to 5 April 2023 in that year. There will be a transitional relief to spread the extra income falling in 2022/23 over five years to 2026/27, but that could push people into higher tax bands for those years (see examples in annex B).

Where the business has over-lap relief arising from when it started trading that over-lap relief will be off-set against profits in 2022/23.

Accounting periods

HMRC is not asking businesses to change their accounting date. Unincorporated businesses will still be able to draw up accounts to any accounting date that suits them. However, an apportionment of profit or loss from different periods of account would be needed to fit to the tax year.

Example

A partnership with an accounting period ending on 31 December would have to prepare the accounts for both 2025 and 2026 in order to file the partnership tax return for 2025/26. That tax return would need to be filed by 31 January 2027, giving the partnership just one month to either finalise the profit figures for 2026 or provide estimates for the tax return.

In practice businesses will tend to change their accounting period to align with the tax year.

Implications for accountants

According to the draft MTD ITSA regulations, the quarterly updates will have to be submitted within one month after the end of that quarterly period. Regulation 11 allows the business to submit a quarterly update early, up to 10 days in advance of the end of the quarter. So there will be an approximate 40 day window to submit the quarterly figures.

The first quarterly period for a business must start on the digital start date that applies to that business (regulation 9). As all unincorporated businesses will now have a digital start date as 6 April 2023, all businesses will be reporting under MTD to the same quarters.

This will create a significant bunching of workload for accountants who deal predominately with unincorporated businesses, in order to meet the quarterly filing deadlines on 5 May, 5 August, 5 November and 5 February, plus of course 31 January.

Businesses might also wish to change their VAT stagger group to fit with the calendar quarters for income tax and their accounting period. Accountants may discourage this in order to spread their workload.

Have your say

The government is determined to make this change. The HMRC consultation on basis period reform only asks for suggestions of how this can be done, what the costs will be for businesses, and if there are any knock-on effects for other tax rules that need to be changed.

You can respond to the consultation by email to: businessprofits.admin@hmrc.gov.uk. The consultation closes on 31 August 2021.

Budget 2021: 3 year loss carry back extension for companies

A range of new grants and loans are being made available for companies as we start to emerge from the disruption of Covid-19. These are complemented by a newly extended 3 year period during which trading losses can be carried back for tax relief purposes. This article explains how this extension works and offers considerations to mitigate the forthcoming corporation tax increase. Note slightly different rules apply to the loss carry back extension for unincorporated businesses.

Understanding the extended loss carry back rules for companies

If a company makes losses in an accounting year, it is able to either carry those losses forward to offset against future trading profits or carry the losses back to offset against profits made in the previous accounting year, thus obtaining a repayment of corporation tax suffered in that year. Company directors will generally choose the ‘carry-back’ option because it provides a cash injection to a currently loss-making company.

A temporary extension was announced in Budget 2021 to the period for which a trading loss can be carried back – for accounting periods ending between 1 April 2020 and 31 March 2022, this carry back period is extended to three years, with losses required to be set against profits of most recent years first before carry back to earlier years.

This extension is said to acknowledge existing and continuing trading difficulties and provide companies with an opportunity to receive a cash injection by way of a refund of corporation tax paid in previously profitable years.

Rules for incorporated businesses utilising extended loss carry back

The amount of trading losses that can be carried back to the preceding year remains unlimited as before.

The extended loss carry back is available for all companies and groups carrying on trades, professions or vocations.

Where the extended loss relief facility is utilised, the maximum amount that can be carried back each year for each relevant accounting period in which a loss is made is £2,000,000. This £2,000,000 limit applies separately to the unused losses of each 12 month period within the duration of the extension with groups of companies having a group cap of this amount.

Example

The Black Sheep Inn Ltd makes a loss in the year to 31 December 2020 but has previously been profitable. Normally the loss could only be carried back to offset against profits made during the year ended 31 December 2019.

Under the new rules, once 2019 profits have been fully offset, up to £2m of such losses can be carried back against profits arising in the years ended 31 December 2018 and, if necessary, 2017.

The extended tax relief available must always be offset against profits from the most recent years first. For example, a loss from 2020 is to be carried back to 2019 before 2018, and then to 2018 before 2017.

Claims must be made within two years of the end of the accounting period in which the loss being carried back arises.

All claims must be made in a corporation tax return however if the claim is £200,000 or lower, it can be submitted before the tax return is due.

Implications for mitigating the corporation tax increase

Also announced in the budget, corporation tax for all companies with profits in excess of £50,000 will increase to 25% from 1 April 2023. The existing rate of 19% will continue to apply to all small companies and a tapered rate will apply to those companies with profits between £50,000 and £250,000. The legislation to ratify this will be in the Finance Bill 2021.

Companies who may be impacted by the new 25% rate and who wish to utilise the extended loss carry back opportunity should evaluate the respective benefits of either claiming a tax refund now through relieving earlier year profits at a rate of 19% or carrying forward losses into the new regime where they may be offset at 25%.  Often company directors prefer to claim a refund of corporation tax already paid rather than wait for an offset against future corporation tax liabilities. However it will be worth bearing in mind the difference in rates before making a final decision.

SEISS: When and how to notify tax return amendments

HMRC has now provided more details on which amendments need to be reported and how to do this.

For the fourth SEISS grant (SEISS 4) HMRC worked out both eligibility and the amount of grant based on submitted tax returns, and any amendments made to those returns, which were received by 2 March 2021.

If an amendment is made on or after 3 March 2021 to tax returns for any of tax years 2016/17 to 2019/20, the taxpayer must consider whether that amendment has an impact on the amount of the SEISS 4 grant they should have received:

  • If, once the amendment is taken into account, the taxpayer would no longer be eligible for the grant, they will need to pay it back in full.
  • If the amendment means the taxpayer would have received a lower grant, the taxpayer will need to repay the excess.

In both cases, the taxpayer needs to notify HMRC to make arrangements for payment.

Unfortunately, this treatment of amendments is very much a one-way street – whilst taxpayers need to tell HMRC if an amendment would mean the taxpayer should receive no, or a lower, grant, there is no scope to claim a higher SEISS grant as a result of an amendment submitted on or after 3 March 2021.

For the purposes of the SEISS 4 Direction, an ‘amendment to a tax return’ has a fairly wide definition. HMRC says that anything which has the effect of modifying a person’s tax return is a relevant amendment for SEISS purposes.

This means that a requirement to notify and repay can arise where the taxpayer or HMRC amends the tax return. HMRC amendments include those made following a tax enquiry, or corrections of returns made under s9ZB TMA 1970.

By contrast, HMRC have confirmed that where a person’s tax position is instead amended via contract settlements, revenue assessment, raising a charge etc. (such that their tax return is not modified) there won’t be an impact on their SEISS grant.

Which amendments need to be notified to HMRC?

Only SEISS 4 and SEISS 5 grants are affected. There is no requirement to pay back any amounts of grant received under earlier rounds of SEISS, where the rules any tax return amendment made after 26 March 2020 is effectively ignored.

In addition, only certain amendments made to tax returns on or after 3 March 2021 need to be notified to HMRC. You need to check what the impact of that amendment on the SEISS grant will be.

No notification or repayment of the SEISS-4 is needed if:

  • the excess SEISS  grant to be repaid is £100 or less; or
  • the initial amount of the SEISS 4 grant received was £100 or less.

We understand that similar rules will apply for the upcoming fifth SEISS grant (SEISS 5), though that is yet to be confirmed.

Where a taxpayer is genuinely unsure as to whether the amendment needs to be notified, they can fill out the online notification anyway and HMRC will confirm the position.

How to notify

There is a special online form for notifying amendments accessed from this guidance page: telling HMRC and paying back SEISS grants.

This guidance contains links to two separate notification systems, one for telling HMRC about amended returns, and the other for telling HMRC about grants claimed where the taxpayer was ineligible or for making voluntary repayments. In order to ensure that the notification is processed correctly, taxpayers need to ensure they pick the correct link.

No agents allowed

As the notification form is behind the government gateway log-in it must be completed by the taxpayer themselves, and cannot be completed by their tax agent. However, the form is fairly simple. It only requires information such as the grant claim reference(s) and the years for which amendments have been submitted. There is no need to calculate the amount of repayment or provide any figures from the amended return.

After the form has been completed, HMRC will send the taxpayer a letter confirming the amount of SEISS grant that needs to be repaid and how to pay it back.

If a taxpayer files paper returns, then the same rules on notifying amendments apply. However, where they would struggle with using the online notification form, they can call the SEISS helpline for assistance.

Notification deadlines

The deadline for notifying HMRC of an amendment depends upon when that amendment was made:

  • If a return has been amended before claiming a grant, HMRC must be notified within 90 days of receiving the grant.
  • If a return has been amended after receiving a grant, HMRC must be notified within 90 days of making the amendment.

If HMRC is not notified, it will write to the taxpayer and look to raise an assessment. Penalties and interest may also apply.

Penalty position

More information on the potential penalties for not notifying an amendment can be found in HMRC’s factsheet CC/FS47. Whilst the position is not entirely clear, this indicates that penalties could be up to 100% of the amount the taxpayer should have paid back where they knew they were not entitled to it.

However, if the taxpayer genuinely didn’t know they had an amount to repay, HMRC will only charge a penalty if they the grant amount has not been repaid by 31 January 2023.

What to do now

There are concerns that the requirement to notify could slip the minds of busy taxpayers. There is no time limit beyond which tax return amendments no longer need to be considered. Changes to returns made some time after claiming a SEISS 4 grant could require a recalculation.

As a tax agent you should ask about SEISS grants whenever you amend a tax return on behalf of a client. Although you may not be able to make the notification on their behalf, clients may need support in working out whether they need to notify and the practicalities of doing so.

Where a taxpayer concludes they don’t need to repay any SEISS grant, perhaps because the impact on their grant would be below £100, it is advisable to keep a record of how they reached that conclusion should HMRC ever come knocking.

VAT: IOSS isn’t that simple for small parcels

The Import One Stop Shop (IOSS) aims to simplify cross-border VAT for consumers. The scheme goes live on 1 July 2021, but already some GB based taxpayers are finding some unexpected complications.

The import one stop shop is an EU wide scheme; the aim is to simplify the movement of goods not exceeding €150 (£135) to consumers (B2C). Without IOSS, non-EU sellers who ship goods into the EU will see the consumer incur import VAT which the consumer must pay to receive their goods.

To improve the customer’s experience, the seller can register for IOSS, then the seller charges VAT to the EU consumer, using the EU consumers local VAT rate. The goods are then shipped clearly showing that VAT has been charged and are delivered with nothing else for the consumer to pay.  The seller submits an IOSS return and pays over the various VAT amounts they have collected from their EU customers at point of sale.

Registration

An EU based business can register for IOSS with their local tax authority. For businesses based outside of the EU, such as in Great Britain (GB), the received wisdom has been to register for IOSS in Republic of Ireland, mainly because of the use of the English language.

The Republic of Ireland recently published its IOSS guidance and the surprise is that a non-EU business cannot directly register for IOSS, registration can only take place via an intermediary.

IOSS guidance

If a non-EU established supplier wishes to register for the IOSS, they can only do so directly if they are established in a country that the EU has a VAT mutual assistance agreement in place with and the goods are supplied from that country to the EU. In those cases, the supplier can register directly in the Member State of their choosing.In all other cases, a non-EU established supplier must register for the IOSS indirectly through the appointment of an intermediary. The registration of the supplier will be done through the intermediary they have appointed to represent them, and the Member State of registration will be the Member State where the intermediary has established their business.

IOSS guidance

The wording suggests that there are two conditions for directly registering for IOSS:

  • there is a VAT mutual assistance agreement in place; and
  • the goods are originating from GB.

The reference to VAT mutual assistance agreement is unclear. The EU law does not require a fiscal representative or intermediary for companies not established in the EU but where there is a mutual assistance agreement in place.

What do EU member states say?

The EU/UK Trade Agreement does include a tax and VAT mutual assistance agreement, but experience so far indicates confusion between EU member states on its application.

Some countries like France have accepted there is mutual agreement and fiscal representatives are not required, but Portugal has stated the opposite, not recognising the mutual agreement. The Republic of Ireland is saying it does not recognise the mutual assistance agreement, at this stage, and so an intermediary is required. Other EU member states are still to decide.

Alternative strategy

The trader could consider setting up a legal entity in Ireland. Perhaps it could attempt to register for VAT in France, or engage a French accountant to do the registration, but leave the filing of returns to the business. There is inevitably a cost to registering for IOSS, as even without the intermediary requirement, it would be wise to seek professional assistance to ensure registration and returns are submitted correctly.

Whilst the uncertainty on legal interpretation will resolve itself in time, if you are a business contemplating using IOSS, then do not wait until July. The window for applications is now open and the time is now to start this journey.

Northern Ireland

HMRC has stated that it aims to open registrations for One Stop Shop (OSS) for Northern Ireland based traders, who are treated as being still within the EU for certain VAT purposes. This suggests there is a mutual assistance agreement in place, even if some member states don’t agree.

An HMRC spokesperson said: “The Import One Stop Shop scheme (IOSS) is an EU system, with use and access governed by EU law. IOSS is an optional system for businesses to use, and where a business opts to use IOSS they will need to follow the EU guidance. Businesses that choose not to opt for IOSS will still be able to continue to export goods to the EU, with any import VAT due continuing to be collected from the recipient.”

HMRC to abolish repayment supplement for 0.5% interest payment

HMRC will pay 0.5% annual interest on delayed VAT claims from April 2022. But the end of the repayment supplement scheme will be a bigger loss.

Most advisers are aware that if HMRC delays repaying a VAT return claim by more than 30 days (plus additional days to give it a reasonable length of time to make enquiries) it will pay a repayment supplement equal to 5% of the repayment amount or £50, whichever is greater.

There is no supplement paid, however, if the claim is significantly adjusted because of errors made on the return. The government’s intention is that the repayment supplement scheme will be scrapped for VAT periods beginning on or after 1 April 2022. But that is not the end of the story.

Interest concession

A recent amendment to Finance Bill 2021 (Amendment 19) means that HMRC will pay interest if it delays a repayment VAT return to check the figures – effective for periods beginning on or after 1 April 2022.

This is great news, you might think, but what is the bottom-line benefit to a business? And is this a fair trade-in for the loss of the repayment supplement scheme?

Widgets Ltd has purchased a big piece of equipment and submitted a repayment VAT return for £100,000 mainly due to input tax claimed on the equipment.

The return was submitted on time but due to inefficient delays caused by the HMRC reviewing officer, it was not repaid for four months. With the repayment supplement regime, the company will currently get £5,000 (£100,000 x 5%) but only £125 interest after April 2022.

The annual interest rate paid by HMRC under the new regime will be 0.5%, assuming the existing rate is unchanged. (£100,000 x 0.5% x 3months/12months).

Interest on errors

So, to move the story forward, what would be the situation if the directors of Widgets Ltd forgot to claim input tax on the new equipment, and spotted the error 12 months later when preparing year-end accounts?

A voluntary disclosure will be submitted to HMRC to correct the error but it will not benefit from any interest payment from HMRC at the moment, even though the taxpayer has supported the government’s working capital for a year.

But that will change from April 2022 as part of the government’s ‘interest harmonisation’ strategy, bringing VAT into line with other taxes. But the annual rate will still be 0.5%.

Official error

The only other time that HMRC will currently pay interest to a business is if a claim or refund has been delayed due to official error on the part of HMRC (s78, VATA1994).

For example, if an officer ruled in writing that ‘product X’ sold by a particular business was standard rated, and it was later found to be zero-rated, leading to a large VAT refund to the taxpayer, then HMRC would pay interest. This will be simple rather than compound interest.

Commercial restitution

The legislation aims to give ‘commercial restitution’ to a business that has suffered a delay getting its VAT refund.

A useful definition of ‘commercial restitution’ in the HMRC VAT manual VSIM1000: “compensation to the party deprived of the use of the money it is owed.”

It’s not clear this is achieved if a business has to pay 7% annual interest on a bank overdraft while waiting for a VAT refund – only getting 0.5% interest back from HMRC!

Conclusion

The proposed abolition of the repayment supplement scheme next year will be a big blow to taxpayers who suffer from unnecessary HMRC delays.

As well as the financial cost of a delayed VAT repayment, which an interest refund is designed to compensate, there are many other costs incurred by a business chasing a repayment, as we all know: professional fees, the cost of time delays waiting for HMRC to answer the phone, telephone bills etc.

HMRC officers have a bigger incentive to get cracking with an enquiry if a big 5% repayment supplement will be paid from the treasury coffers (a black mark against the officer), compared to a miserly 0.5% interest.

Super deduction U-turn enables landlords to claim

Rishi Sunak’s super deduction scheme is now set to apply to the initially excluded landlord lessors after the government changes its mind and amends the Finance Bill.

Given the importance of commercial property sector to our economy, it was always mystifying why landlords were excluded from claiming the new capital allowances super deduction. However, that situation is about to be rectified.

What is the super deduction?

In Sunak’s Budget on 3 March 2021, a number of new tax incentives were introduced to encourage investment and re-boot the economy in a post-pandemic bounce-back. The new 130% super deduction First Year Allowance (FYA) lowers tax bills by around an extra third for expenditure on new ‘main pool’ plant and machinery.

The accompanying 50% Special Rate FYA, or SR allowance as it is known, gives an eight-fold acceleration of tax relief compared to the 6% writing down allowance (WDA) previously available for a range of other plant and machinery assets.

This is a time-limited opportunity because the new measures are only available for expenditure incurred between 1 April 2021 and 31 March 2023.

Institutional investors and property investors generally, are the driving force behind much of the development of new commercial property. Given that such developments are responsible for the creation of countless jobs in the construction industry and associated supply chain, it seemed completely illogical that lessors of property should be prevented from claiming the relief.

This situation was due in part to the arcane rules in the capital allowances legislation at CAA 2001 S46 which excludes giving FYAs to lessors of plant or machinery.

Government changes heart on landlords

Now, in what would appear to be a complete change of heart, the government has sponsored an amendment to clause 9 of the Finance Bill which would mean that lessors of property can avail of the relief too.

This is a significant and welcome change and is the result of some intense lobbying of HMRC by professional practitioners and the property industry itself. It always appeared inequitable that lessors should be excluded from the incentive and the following example illustrates the relief that they were missing out on.

Value of the super deduction

A property investor has taxable profits of £130,000 at its financial year end. During the year it carried out a building project and spent £100,000 on ‘main pool’ plant and machinery such as fitted furniture, sanitary appliances, fire alarms and so on.

The value of plant and machinery allowances with and without the super deduction is shown below.

Tax without super deduction Tax with super deduction
Profit before tax £130,000 Profit before tax £130,000
Main pool plant & machinery tax write-off: £100,000 x 18% (£18,000) Main pool plant & machinery tax write-off: £100,000 x 130%    (£130,000)
Taxable profit £112,000 Taxable profit nil
Tax bill: £112,000 x 19% £21,280 Tax bill nil

This amendment addresses a fundamental unfairness in the operation and application of the super deduction regime and consider that it will be a significant stimulus and acceleration for investment in property over the course of the next two years.

Five Brexit VAT facts confirmed

This article explores five VAT facts about Brexit to check in with your knowledge on this years new VAT procedures.

Fact 1 – Postponed VAT Accounting (PVA) can be used for goods imported into GB from anywhere in the world and not just the EU.

HMRC’s guidance has made it very clear that the VAT rules for EU and non-EU supplies are now the same. For example, an import of goods from Germany into GB is treated the same as an import from America. A VAT registered importer can elect for PVA on each arrival of goods in order to defer the payment of VAT to HMRC and account for it instead on their next VAT return with a reverse charge calculation. The importer must have a GB EORI number in place before the goods arrive.

Fact 2 – If a business sells goods which go from GB to a private individual in the EU, they will always be zero-rated for UK VAT purposes.

A shipment of goods from GB to any country outside the UK is an export for VAT purposes, and therefore zero-rated. The exporter should keep proof of shipment, plus commercial documentation, to support the zero-rating.

Fact 3 – If a GB business buys and sells goods in an EU country, it will need to register for VAT there.

Imagine that a GB business has the chance to make a quick profit on some goods it has purchased in Ireland. The Irish supplier has charged £20,000 plus 23% Irish VAT. The goods never leave Ireland and are sold on to another Irish business for £30,000.

In this situation, the GB business is making taxable supplies in Ireland and should register for Irish VAT. This is because a zero-registration threshold applies to an overseas business making sales in an EU country. However, VAT should not be a cost to any party, assuming the final buyer is VAT registered and able to claim input tax. The GB business will claim input tax on the £20,000 purchase price on its Irish VAT return, and sell on for £30,000 plus 23% Irish VAT. It has made a healthy £10,000 profit on the deal.

Fact 4 – Northern Ireland is effectively treated as an EU member as far as trading in goods is concerned.

It has been a big challenge for VAT advisers to refer to ‘GB’ when it comes to post-Brexit VAT issues for goods and ‘UK’ when it comes to services. Goods moved from GB to NI are subject to customs declarations and possibly duty if they are ‘at risk’ of being sold onto the EU, ie, mainly linked to the open border between Northern Ireland and Ireland. There is an imaginary customs border between GB and NI somewhere in the Irish Sea.

EU VAT rules apply to goods moved to or from Northern Ireland to EU member states. A GB business that regularly ships goods to NI should use the TSS (Trader Support Service) for help with customs declarations and other paperwork.

Fact 5 – If a UK business sells electronic services into the EU, to any non-business customer, it must charge the customer the VAT rate that applies in their country.

An electronic service is one that involves ‘minimal human intervention’ and is ‘heavily reliant on the Internet’ for its delivery. An easy example is the sale of downloaded software.

Until 31 December 2020, a UK business could carry on charging UK VAT for their electronic B2C sales to EU customers, if total annual sales were less 10,000 Euros (£8,818). But this deminimis threshold ended when we left the EU – a zero threshold now applies. A UK business must register with for the non-Union MOSS scheme in an EU country of its choice, so it can charge and declare the VAT collected on electronic sales made in the different EU states.

Five Brexit VAT myths debunked

It’s over five months since the UK left the EU. This article tackles five ‘myths’ about the post-Brexit VAT world.

Myth 1: Postponed VAT Accounting (PVA) is a temporary facility that will end on 30 June 2021.
It’s not clear how this rumour started but PVA is here to stay.

It is a complete winner for UK importers because the payment of VAT is deferred when goods arrive in GB from anywhere in the world, and is declared instead as a reverse charge entry on the importer’s next VAT return.

It is a cashflow no-brainer. One suspects the confusion with this date relates to the time when the need to make a full customs declaration for goods arriving from the EU can be delayed.

Myth 2: Applying the reverse charge for imported goods with PVA always produces a nil payment outcome on a VAT return.
The relevant boxes for the reverse charge for imported goods are Box 1 and Box 4 as far as the VAT amount is concerned, based on the rate of VAT that applies under UK VAT law for the goods in question, eg 5% for smoking cessation products; 20% for computers.

As long as the goods are only used for the taxable supplies of a business, the entries will cancel each other out, ie output tax equals input tax.

But the Box 4 input tax entry must be reduced for any private or non-business use and also if the goods are used for any exempt activities (partial exemption). If an input tax reduction is necessary, it produces a net VAT payment to HMRC.

Myth 3: To benefit from PVA, a business must register online with HMRC before the goods arrive in the country.
A pre-requisite of using PVA is for the importer to have a GB EORI number, issued by HMRC. But PVA is made as a specific election on the customs declaration form each time that goods arrive by ticking payment option G on the form. It is an ‘election’ process and not a ‘registration’ procedure.

Myth 4: If I export goods, they are always zero-rated for VAT purposes, so I don’t need to worry about VAT.
Sales of goods from GB to anywhere in the world outside the UK are now zero-rated as an export as far as UK VAT is concerned. An export was previously only relevant if goods left the EU.

However, VAT has not gone away – you need to consider the indirect tax and duty issues when the goods arrive in the other country. The best outcome is to try and get your customer to act as the importer, otherwise your business might need to register for VAT in that country if it is importing goods and selling them there.

Myth 5: There are no changes in the VAT rules for services post-Brexit.
It is true that the general B2B and B2C place of supply rules are unchanged since 1 January 2021, ie the VAT treatment largely depends on where the customer is based for B2B sales of services and where the supplier is based for B2C sales.

But there is an important list of professional services which are no longer subject to UK VAT if the B2C customer is ‘outside the UK’ – this was only relevant before Brexit if the customer was ‘outside the EU’. The services are listed in VAT Notice 741A, section 12. Examples include accountancy, consultancy, engineering and legal services.

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.