Neil Warren's 2021 fantasy Budgetby
AccountingWEB's award-winning VAT writer takes the opportunity to tell Rishi Sunak the reforms he should announce on 27 October.
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.
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.
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.
Want to keep up with the latest on the Autumn Budget? Rebecca Benneyworth, Peter Rayney, Paul Aplin, Anita Monteith and more will be discussing the announcements and what it means for your clients at AccountingWEB Live Expo. Registration is now open for the 1-2 December 2021 exhibition at the Coventry Building Society Arena.