Business Law & Compliance

VAT in 2020: What you need to know
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VAT in 2020: What you need to know

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With Brexit on the verge of ‘getting done’ Alison Horner, indirect tax partner at MHA MacIntyre Hudson, looks at the outlook for VAT in 2020, arguing companies need to adapt both to changes brought about by Brexit and from new EU measures to combat fraud.

Along with Customs Duty, VAT has been one of the most fraught issues for UK businesses in the Brexit process so far. As no deal seems to have been avoided, they may be under the impression there will be no immediate change to VAT requirements, but this is not correct, says Horner. Both Brexit and an unrelated EU rule change designed to combat fraud mean UK businesses have to take care getting their VAT reporting right this year. “They also need to start planning for trading with the EU under the proposed framework of a Canada style Free Trade Agreement and this involves complex VAT procedures and applications,” she says.

Business as usual for now, but plans need to be in place to leave the Customs Union

Once the Brexit Bill passes for Royal Assent at the end of January, the UK will enter a transitional period ending on 31 December 2020 unless an extension is agreed. Existing intra-EU VAT rules will apply throughout the transitional period as we remain within the Customs Union – although these have already changed from last year.

“However, businesses in manufacturing, food, motor and those with EU parent companies need to start planning for new looser trading arrangements with the EU which could come into force as early as 2021,” Horner adds. They need to consider a variety of schemes such as AEO (Authorised Economic Operator), a quality kite mark important for secure supply chains, and IPR (Inward Processing Relief), which enables goods to move across a border and to be subject to processing or manufacturing without triggering Customs Duty or VAT.

“Another vital scheme is Customs Warehousing. This allows goods to be imported into the UK without being subject to Customs Duty or VAT until they leave the warehouse.”

Access to a Customs Warehousing scheme will allow a company to import a good from, for example, China and then move it to the EU while only paying Customs Duty and VAT once. According to Horner, this will be essential for businesses importing from the USA or China for onward sale to the EU and for those businesses who trade with Southern Ireland, using Northern Ireland as a logistics route. The applications for all of these schemes are complex and have a long lead in time.

No-deal is not necessarily off the table

“The no-deal emergency measures will be mothballed for now, hopefully never to see the light of day again,” Horner explains. “However, the amendment to the Brexit Bill to prohibit the extension of the transition period raises the potential risk of a no deal at the end of 2020.” Most observers agree that 11 months to negotiate and finalise a Free Trade Agreement is wildly optimistic and without the ability to extend, no deal does not disappear.

“This means those companies signed up to the TSP (transitional simplified procedures) measures implemented by HMRC to make imports into the UK easier for the first year of a no-deal situation should keep these on file in case no deal raises its head again. However, businesses in TSP don’t need to set up a Duty Deferment account as this is not a requirement for now.”

Changes to VAT from the EU is coming regardless

Major VAT changes in the EU came into force on 1 January 2020. UK businesses need to be aware and take care to be compliant, Horner warns. The EU VAT system exempts goods (otherwise known as zero-rating) despatched from one member state to another and from one taxable person to another, provided certain conditions are met. The system was designed to facilitate economic integration while combatting fraud.

“HMRC have now published their interpretation of the new EU rules which will apply to the UK throughout the transitional period. Suppliers must hold evidence such as airfreight invoices, a signed CMR document or note and receipts from a relevant warehouse among other forms of documentation in the right combination in order to qualify for zero-rating,” she says.

“In addition it is necessary to regularly check that a customer VAT number is valid and to hold proof that this has been done. Business should not believe that HMRC will enforce these new regulations loosely during the transition period – although a pragmatic approach is hoped for.

“Many companies were operating on a heightened state of alert last year given the political turmoil and were paying close attention to administrative changes they needed to implement in the event of various Brexit outcomes.

While it’s tempting to think, following the election outcome, that uncertainty is in past, says Horner. “But there are still plenty of potential changes in the pipeline and businesses need to be aware of so they have their VAT house in order no matter what the final outcome of Brexit will be.”

What is VAT?

VAT, or Value Added Tax, is levied on the sale of goods and services in the UK. It is a type of ‘consumption tax’ because it is charged on items that people buy and is also an ‘indirect tax’ because it is collected by businesses on behalf of the Government.

What are the current VAT rates in the UK?

The standard rate of VAT in the UK is currently 20% and this is the rate charged on most purchases. There are other VAT rates which you need to be aware of as a small business, which we cover in detail below. EU law dictates that the standard rate of VAT in EU states should not be lower than 15%.

Snapshot of UK VAT rates

Reduced rate VAT: Charged at 5% – Sanitary products, energy saving measures and children’s car seats.

The zero rate: Charged at 0% – Most food, books, newspapers and children’s clothes. Even though no VAT is charged, the sale of zero rate goods and services has to be recorded and reported on your VAT return.

VAT ‘exempt’: Charged at 0% – Postage stamps and financial and property transactions. The sale of these goods and services still need to be counted in your taxable turnover.

How has the VAT rate changed?

VAT was introduced in 1973, replacing the Purchase Tax, which applied when goods and services were produced and distributed not when they were sold. Purchase Tax had a different rate for different types of goods.

The standard rate of VAT has changed over time, raised or lowered by the Government depending on the needs of the economy.

Year Standard rate of VAT
1973-74 10%
1974-79 8%
1979-91 15%
1991-2008 17.5%
2008-09 15%
2009-11 17.5%
2011-present 20%

Who pays VAT?

Businesses charge their customers VAT but must then pay this to HMRC when they file their VAT return. Businesses with a turnover of more than £85,000 must register to pay and charge VAT on the products and services they buy and sell. Other businesses can choose to register for VAT voluntarily.

How do you pay VAT?

HMRC can accept VAT payments in a number of different ways.

  • Using Faster Payments on the phone or online – Same day or next day payments
  • By CHAPS using an online form – Same day or next day payments
  • Direct debit – Up to 3 working days
  • BACS – Up to 3 working days
  • Standing order (for some VAT schemes) – Up to 3 working days
  • Debit or credit card – Up to 3 working days
  • At a bank or building society – Up to 3 working days

Read the ‘Pay your VAT bill’ section of the Government’s website for more information.

How to charge VAT

VAT is an indirect tax, collected by businesses on behalf of the Government, which means that this cost needs to be added on top of the amount charged to customers for goods or services at the point of sale.

Invoices need to include:

  • An invoice number
  • The invoice date (and the date the goods and services were supplied if this is different to the invoice date)
  • The name and address of your business
  • Your VAT registration number
  • The customer’s name and address
  • A description of the goods and services covered

Each item on your invoice should clearly state:

  • The unit price excluding VAT
  • The quantity
  • The VAT rate
  • The total to pay excluding VAT
  • The amount of VAT to pay
  • Any cash discount

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