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Neil Warren's 2021 fantasy Budget

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AccountingWEB's award-winning VAT writer takes the opportunity to tell Rishi Sunak the reforms he should announce on 27 October.

7th Oct 2021
Independent VAT Consultant
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Madam Deputy Speaker, I now turn my attention to VAT, a tax where important concessions have been given in the last eighteen months to help businesses recover from the coronavirus pandemic. And I today have a major announcement to make about VAT, which will be welcomed by many businesses and the accountancy profession. I will save this announcement for the end of my speech.

12.5% rate extended by six months

The hospitality industry has been badly affected by the pandemic but it is now recovering strongly. A reduced 5% VAT rate was introduced for most supplies from July 2020, which was increased to 12.5% on 1 October 2021, with a view to 20% VAT being restored on 1 April 2022. However, I am pleased to announce today that I will extend the 12.5% rate until 30 September 2022, producing tax savings for the whole of next summer and, hopefully, continuing the boost in ‘staycation’ holidays that we have seen in the last two years.

Cash accounting threshold increased

I now turn my attention to VAT schemes.

Many businesses have encountered cash flow problems since the pandemic, and customers in many sectors are taking longer to pay their invoices. Smaller businesses are helped with their cash flow by the VAT cash accounting scheme, which means that VAT is not declared on a return until customers pay, rather than the earlier date when a sales invoice is issued.

I have therefore decided to increase the annual sales threshold for which a business can join and use the cash accounting scheme from £1.35m to £2.7m. This change will take effect from 1 January 2022. I will also apply the same increase to the annual accounting scheme. The doubling of the cash accounting threshold will help an estimated 100,000 businesses with their cash flow challenges.

Increase in business gifts limit

Madame Deputy Speaker, I was surprised to learn that a business can only make a VAT-free gift to a hard-working employee or loyal customer if the annual value of gifts given to that person is less than £50. This limit has been in place for over twenty years and needs to be increased. Rewarding hard-working employees is important for any business and something that this government actively encourages. I therefore propose to increase this limit to £200 from 1 July 2022.

Simplification

VAT is a complicated tax, and it is important to make simplifications where possible.

One complicated issue, created by our past need to comply with EU law, is that VAT can be claimed by a business on entertaining its overseas customers but only if the entertainment provided is not ‘excessively lavish’. This definition has created confusion, so from 1 January 2022, the law will be amended so that a business can only claim VAT on entertaining its staff and no-one else.

As another simplification measure, I have also asked HMRC to consider the abolition of the partial exemption de minimis limits.

MTD for voluntary registrations delayed for four years

Madame Deputy Speaker, I now come to my most important VAT announcement – and I am sure that it will be welcomed by the House.

Four weeks ago, HMRC announced its decision to delay the introduction of Making Tax Digital for income tax for sole traders and landlords until April 2024. This delay was welcomed by businesses and accountants, being one less issue for them to deal with as they recover from the pandemic.

From 1 April 2022, HMRC and business owners will be faced with two important VAT changes, namely the introduction of a new penalty system for late returns and payments, and also the extension of Making Tax Digital to 1.1 million businesses that are registered for VAT on a voluntary basis. Complying with MTD will create a lot of extra costs and use up valuable time for these businesses which, by and large, have simple VAT reporting procedures.  

I am pleased to announce today that the introduction of MTD for these businesses will be delayed until VAT periods beginning on and after 1 April 2026. Our long-term objective is for our tax system to be fully digital by 2030 and that outcome will be achieved but the timing of changes needs to be right.

Conclusion

Madame Deputy Speaker, my package of VAT measures has been focused on helping businesses to recover from the pandemic, and I commend it to the House.

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Replies (7)

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By Paul Crowley
07th Oct 2021 16:43

Simple measures that we would all applaud
Given that the VAT tax gap has incresed since MTD the delay would increase the VAT yeild, based on HMRC "statistics".

Thanks (4)
Replying to Paul Crowley:
Jason Croke
By Jason Croke
08th Oct 2021 10:03

Perhaps HMRC simply under-estimated the issue? If one aspect of MTD was to close the VAT gap, the VAT gap can include genuine accounting errors as well as fraud.

If a typical business tried its best and made some errors then MTD wouldn't necessarily stop that error from happening again (the old computer motto of rubbish in=rubbish out, stands true), and a business that was under reporting sales, cash in hand and other VAT scams, MTD wouldn't reveal any of those as those sales would take place outside of the software anyway.

A typical area of risk is takeaway food outlet, under reporting sales being the usual ruse, so if the taxpayer was supressing 30% of sales every week using books and excel, a switch to MTD isn't going to see them suddenly becoming honest, they'll just continue to maintain the same level of supressing sales, two card machines or two bank accounts for the cash, and MTD achieves nothing in closing the gap.

Thanks (5)
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By Hugo Fair
07th Oct 2021 17:48

Well you might need a new political party first for a Chancellor to be appointed with such a radical (aka common-sense) approach!
But why stop there ... there's loads more VAT operational issues that need to be simplified, or at least better organised, in the realms of import/export. And of course there's plenty of fun to be had in rationalising all the other taxes (CT, CGT, IHT, PAYE et al) that have grown higgledy-piggledy over the years into the mess of spaghetti that we all know (and occasionally love).

Thanks (3)
Jason Croke
By Jason Croke
08th Oct 2021 09:56

Nice "Budget" Neil.

Madam Deputy Speaker, if I may respond to the honourable Chancellor, I believe the removal of the flat rate scheme should also be considered in his proposals.

It causes more confusion than it does simplify things, more so with the limited cost trader rules and with the onset of MTD (notwithstanding his intention to delay it for 4 years), most business today have some form of automated or electronic accounting, even if just an excel spreadsheet, whereas FRS was introduced decades ago when people still did things with paper and a pencil.

The savings to HMRC in one less scheme to administer, as well as giving taxpayers a simpler choice and with less chance of error or confusion.

Thanks (2)
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By Helen Rolfe
08th Oct 2021 10:03

Oh if only.................. but alas I doubt such sense will prevail in the House

Thanks (1)
RLI
By lionofludesch
08th Oct 2021 10:36

Shortest Finance Bill for many a year.

Thanks (0)
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By mkowl
08th Oct 2021 11:03

As the speech is on my 20th wedding anniversary can I suggest an immediate reduction to 0% VAT on hospitality and flowers, plus a very specific one day only Eat Out to Help Out voucher. Who says us Yorkshire folk are tight

Thanks (2)