Budget 2021: VAT

Temporary reduced rate of VAT for leisure and hospitality extended 

The Government has extended the temporary reduced rate of VAT that is currently in place for leisure and hospitality businesses, a sector that has been one of the hardest hit by the coronavirus emergency. 

On 15 July 2020 the VAT rate for supplies of hospitality, hotel accommodation and admission to attractions was cut from 20 per cent to 5 per cent. That temporary reduced rate was due to come to an end on 31 March 2021. However, successive lockdowns have meant that the leisure and hospitality sectors have barely been able to trade for much of that period and so have not yet received much benefit from the reduced rate.

As expected, the Chancellor has decided to extend this reduced rate. The rate will remain at 5 per cent until 30 September 2021. The surprise is that this will then be followed by an interim VAT rate of 12.5 per cent which will apply from 1 October 2021 and run until April 2022 when the standard 20 per cent rate is expected to be reinstated.

This is very welcome news for leisure and hospitality businesses who will continue to benefit during what is likely to be a long and drawn out reopening of the industry from the Government’s planned date of 21 June 2021.

It is expected to cost the Exchequer over £4.7bn and could create systems challenges for some businesses that have another VAT rate to apply. There was also good news for pubs and restaurants with a freeze on alcohol duties.

HMRC confirms locations of freeport sites

Further to a consultation process in 2020, the Government has named its proposed sites for new freeports in England. East Midlands Airport, Felixstowe & Harwich, Humber, Liverpool City Region, Plymouth and South Devon, Solent, Teesside and Thames have been successful in their bids and are expected to begin freeport operations from late 2021.

Discussions continue between the UK government and the devolved administrations on freeports in Scotland, Wales and Northern Ireland.

The proposed core customs and tariff benefits (along with a variety of corporate tax and National Insurance contributions reliefs from April 2022) are:

  • duty suspension – no tariffs, import VAT or excise to be paid on goods brought into a freeport from overseas until they leave the freeport and enter the UK’s domestic market;
  • duty inversion – if the duty on a finished product is lower than that on the component parts, a business could benefit by importing components duty free, manufacture the final product in the freeport, and then pay the duty at the rate of the finished product when it enters the UK’s domestic market;
  • duty exemption for re-exports – a business could import components duty free, manufacture the final product in the freeport, and then pay no tariffs on the components when the final product is re-exported; and
  • simplified customs procedures – when goods are brought into the freeport zone, the importer makes a simplified declaration of their arrival, with a full customs entry only being due if and when the goods are subsequently imported into the UK - entry summary declarations for safety and security will still be required.

RSM UK's International Trade partner, Brad Ashton,  commented on these reforms last year, highlighting the risk that these freeports will be a zero-sum game, with only modest job gains for the successful applicants coming at the expense of job displacement elsewhere.

Default surcharges and repayment supplements to be replaced

HMRC’s long standing plans to replace VAT default surcharges and repayment supplements will finally be rolled out for VAT periods starting on or after 1 April 2022. This is part of a new system of penalties for late submission of returns and late payment of tax and will cover both VAT returns and income tax self-assessment (ITSA). 

Late submission penalties: instead of the automatic issue of a surcharge when a VAT return is submitted even one day late, HMRC will impose a single penalty point on businesses accounting for VAT on a quarterly basis, that will not incur a financial penalty unless they exceed a points threshold for multiple missed returns. For a business submitting VAT returns on a quarterly basis, the threshold is four points – once they have reached that threshold, a penalty of £200 will be issued for every missed submission until they have submitted all outstanding returns and completed a period of full compliance of 12 months. Where the business does not reach the penalty threshold, points will expire from their record after two years. The Government says this new system will penalise persistent late filers rather than those who make an occasional mistake. 

Late payment penalties: A penalty will be imposed at 2 per cent of the outstanding tax if the tax due on a return remains unpaid 15 days after its due date. If any of this tax is still unpaid after day 30, the penalty increases to 4 per cent of the tax still outstanding at that point. The taxpayer will also begin to incur a second, additional penalty on tax still unpaid from day 31 at a rate a 4 per cent per year on the outstanding amount. This will cease to accrue when the business pays the tax that is due. If the taxpayer requests and is granted a time to pay (TTP) arrangement by HMRC within 15 days of the due date of the VAT return, no late payment penalty is due and a discounted penalty rate of 2 per cent applies if a TTP arrangement is requested and agreed 16-30 days after the due date.

HMRC has discretion to reduce or waive these penalties, and taxpayers will have the right to appeal against the imposition of penalties or points on reasonable excuse grounds.

The new regime will also impose late payment interest (calculated at 2.5 per cent above the Bank of England base rate) on tax outstanding after the due date for a return. This applies from the due date until the date payment is finally made to HMRC. HMRC will similarly be liable to pay repayment interest (calculated at 1 per cent below the Bank of England base rate, with a minimum rate of 0.5 per cent) to taxpayers when it is late refunding VAT claimed on a VAT return.

Most businesses will be glad to see the end of the VAT default surcharge regime, which currently calculates penalties as a percentage of the net tax due on the VAT return. Over the years, this has resulted in very large fines for those who submit and/or pay their VAT return just a few days late. There have been examples of the courts upholding six figure penalties against businesses that submitted and paid a high value VAT return just one day late. The new approach will certainly result in more proportionate penalisation of late submission of VAT returns, which often occurs due to administrative error rather than any intention to deprive the revenue of payment. Businesses will also welcome the decision not to issue late payment penalties for at least 15 days after the due date, but those who delay longer could find themselves caught up in a complex web of escalating penalties from which it may be difficult to escape. However, as HMRC will continue to penalise those who fail to submit and pay their VAT returns, this is expected to remain a much-litigated area. The Government has previously said that it plans to eventually roll this regime out to other indirect taxes too, so we will watch for further developments. 

For more information please contact
Philip Munn Philip Munn

Partner

Brad Ashton Brad Ashton

Partner