Fantasy Budget: Neil Warren’s dream to simplify VAT
With the Spring Budget less than a month away, Neil Warren has drafted a Budget speech for Chancellor Sunak that reduces opportunities for unfair profit and rights some wrongs.
Madame Deputy Speaker – I now turn my attention to VAT, described by some commentators as ‘the nation’s favourite tax.’
Now that we have left the EU, we have, for the first time since 1973, the chance to make our own VAT laws, without reference to the EU VAT Directive. This means that we can now extend our zero-rates to give important concessions and tax savings to areas where it is needed most.
A situation where many people are faced with uncertainty, worry and a large financial cost relates to cladding replacement work needed on blocks of flats following the Grenfell Tower disaster in 2017. This has meant that many leaseholders are currently unable to sell or remortgage their apartments until the corrective work has been carried out, and the building can be issued with form EWF1 by an architect.
I propose two measures to help this situation.
First, I will double from £1bn to £2bn the grant fund that has been set aside to provide support to leaseholders where cladding work is needed.
Second, I propose to zero-rate the supply of builder services and materials used as part of the corrective work that is needed on the structure of residential buildings.
This measure will give a welcome boost to the construction industry as it recovers from the coronavirus crisis, but it will also ease the burden on apartment owners who, when they purchased their flats, had no idea about the cladding problem in the structures of the building.
Madame Deputy Speaker – to continue with VAT issues, I have been concerned at the way that VAT has been allowed to evolve from a simple tax as it was first envisaged, to one that has many loopholes that need to be re-evaluated. The basic principle of VAT is that you charge VAT on your sales and claim VAT back on your related costs.
One part of the legislation that has produced unjustified VAT savings relates to the partial exemption de minimis rules. These rules mean that a VAT registered business can claim up to £7,500 a year of VAT on costs that relate to its VAT exempt activities.
For example, a VAT registered business renovating a residential property for rent or sale, could spend up to £37,500 on building work in a tax year, and claim VAT on these costs in many cases. This cannot be right – and I therefore propose to abolish the partial exemption de minimis thresholds from 31 March 2021.
This will also produce a simplification of the tax because there are three different de-minimis tests that a business must consider.
The flat rate scheme was introduced by Labour in 2003, with the intention of simplifying VAT accounting for small businesses.
In those days, many small businesses used manual bookkeeping systems to complete their VAT returns and the time saving benefits of the flat rate scheme were worthwhile.
However, times change and from 1 April 2022, all businesses must submit their VAT returns using MTD-compatible software and keep VAT records in a digital form. It has become clear that the main reason why businesses remain in the flat rate scheme is that it produces a reduced VAT bill compared to normal VAT accounting. I have therefore decided to abolish the flat rate scheme from 31 March 2022.
Madame Deputy Speaker, I also want to announce two changes to builder services where VAT is charged at 5%.
This reduced rate was introduced to increase the number of habitable homes in the country. For example, the reduced rate applies to conversions of commercial properties into dwellings. It also applies when work is carried out on a dwelling that has not been lived in for at least two years.
There are many cases where investors buy properties on a speculative basis and keep them empty in anticipation of capital appreciation. The building work then qualifies for 5% VAT after two years. To discourage this investor strategy (we want all homes to be occupied), I will increase the empty period requirement from two to five years from 1 September 2021.
The 5% VAT rate also applies when a project results in a changed number of homes after the work has been completed. This is logical for projects that produce an increase in the number of homes in a building, for example a house converted into four flats.
But it is not right that the rate also applies when a project results in fewer homes being created, for example, two semi-detached houses being converted into one big detached property. The legislation will therefore be amended so that the 5% rate only applies when a project produces an increased number of homes.
Finally, with a view to VAT simplification, I have asked HMRC to review whether the number of retail schemes in the legislation can be reduced, with a view to all retailers accounting for VAT on a ‘point of sale’ basis. This review should take into account the technological advancements that have been made in recent years.
I commend this Statement to the House.
Neil’s Budget wish-list:
- New zero VAT rate for cladding replacement work on high rise residential buildings
- Partial exemption de minimis threshold abolished
- Flat rate scheme abolished
- Homes must be empty for five years rather than two to qualify for 5% VAT on building work
- 5% VAT rate restricted to work where number of dwellings is increased when the work has been completed
- HMRC to review all retail schemes and consider ‘point of sale’ accounting for all retailers.