The world of taxation never stands still - and our aim in these pages is to keep you up to date with the very latest changes to UK tax and customs legislation, with particular reference to Value Added Tax.
Income tax changes
The chancellor made a number of tweaks to income tax rates, rules and allowances.
The following changes will be implemented from April 2018:
Personal Allowance increase
Personal allowance has been increased from £11,500 to £11,850. This means higher rate tax rates will now apply only when income net of personal allowance reaches 46,350. National Living Wage will rise from £7.50 an hour to £7.83.
Marriage allowance extension – deceased partners
Marriage allowance permitting a transfer of 10% of a spouse’s or civil partner’s personal allowance is now extended to personal allowances of deceased spouses or civil partners.
Mileage allowance for unincorporated property landlords
The use of mileage allowance of 45p and 25p per mile will be made available to property rental businesses. Individuals and partnerships (with individual members only), running property business will now be given an option to choose between a mileage allowance or deducting actual running costs and claiming capital allowances. This will be available in respect of existing as well as newly purchased vehicles.
General mileage rates will not be available in respect of vehicles for which capital allowances have already been claimed, or for which expenditure in acquiring the vehicle has been deducted in a business using the cash basis. However, transitional arrangements will apply, allowing the preservation of capital allowances already claimed between years 2013/14 – 2016/17. Any further capital allowances will be denied. Instead, from 2017/18 onwards, landlords will be able to claim the mileage allowance.
Benefit in kind exemption on charging electric cars
Electricity used as fuel for electric cars, paid for by employers, will not constitute a benefit in kind when there is an element of private use of such cars.
Increase in benefit in kind for diesel cars
The diesel supplement rate to calculate the benefit in kind arising on private use of company cars is increased form 3% to 4%. This applied solely to diesel cars (not hybrid cars) registered on or after 1 Jan 1998 with no NOx emission value or those which exceed RDE2 standard (80mg/km). The maximum percentage for cars including any diesel supplement will remain at 37%.
The diesel supplement charge is completely removed for diesel cars certified up to the RDE2 (80mg/km).
Increase in benefit in kind for private use of company vans and fuel for private use of company cars
From 2018 the value of the taxable benefit will rise in line with the September 2017 RPI to:
flat rate benefit charge will be increased from £3,230 to £3,350
the flat-rate van fuel benefit charge will increase from £610 to £633
the multiplier for the car fuel benefit charge will increase from £22,600 to £23,400.
Increase of the EIS and VCT personal investment limit and loosening of anti-avoidance
Investment limit in EIS and VCT qualifying shares is increased from £1m to £2m, provided that amounts over and above £1m are invested in one or more knowledge-intensive companies (the maximum tax advantaged investments such companies can receive is £10m).
In addition a number of qualitative changes have been introduced to the EIS and VCT schemes. These largely relate to the qualifying conditions applying to companies which will be able to offer EIS tax reliefs to investors (for example the risk level of such investments) and anti-avoidance measures.
The anti-abuse rules are intended to prevent multiple claims of income tax relief on what is, in effect, the same investment. The current rules are that income tax relief is denied on a VCT share subscription if that investment takes place six months after a share disposal in the same VCT vehicle or another VCT, where those VCTs merge. This previously applied to all mergers, including those which take place several years after the subscription, or are carried out purely for commercial reasons and are not tax driven.
From 2018 the merger restriction on claiming income tax relief will not apply if merger takes place more than two years after the subscription, or less than two years if at the time of the subscription the individuals subscribing for the shares could not reasonably be expected to know that the merger or restructuring was likely to take place, or obtaining a tax advantage was not one of the main purposes of the merger.
Changes to the NIC system
Increase to Class 4 NIC rate from 9% to 10% and 11% in 2018 and 2019 respectively has been abandoned. The reform of the NIC system has been put on hold. The abolition of Class 2 NICs, reforms to the NICs treatment of termination payments, and changes to the NICs treatment of sporting testimonials are being delayed by one year.
Tax free accommodation allowance for members of the armed forces
Income tax exemption is granted for payments made to members of the armed forces to help meet the cost of private accommodation purchased or rented, in addition to the benefit-in-kind free accommodation provided by the ministry of defence.
Changes made (or signalled) to thresholds, EU imports, vouchers and refunds.
Two-year threshold freeze
In response to the announcement of a VAT simplification by the Office of Tax Simplifcation (OTS) earlier this month, the chancellor has decided to freeze the VAT threshold from April 2018 and will maintain its current level of £85,000. However, he has also indicated that these thresholds are far greater than in the rest of the world, so businesses should expect a reduction in the threshold after April 2020.
Government will be looking at the options available for accounting for VAT when importing goods from the EU. This will be necessary for the benefit of UK businesses and economy after the Brexit negotiations conclude. At present, businesses postpone accounting for VAT when importing goods from the EU, which provides them with a significant cashflow advantage.
A consultation has been announced to bring vouchers into the VAT regime from 2018/19. Once this has been made law, businesses will be accounting for the same rate of VAT on payments made with vouchers. This would bring the UK into alignment with similar rules applicable across the rest of the EU.
VAT evasion clampdown
Online fraud comes in for battery of anti-evasion moves.
The government has announced two major changes in its anti-VAT fraud measures as a result of consultations earlier this year. These are:
1. Reverse-charging in construction
A new VAT domestic reverse charge will be introduced from October 2019 to tackle VAT fraud in the construction industry scheme. This measure will shift responsibility to the recipient for self-accounting for VAT due.
2. Online fraud
The chancellor made the following announcement to clamp down on VAT fraud committed online:
The government will legislate in the Finance Bill 2017/18 to extend HMRC’s powers to hold online marketplaces jointly and severally liable (JSL) for the unpaid VAT of overseas traders on their platforms to include all (including UK) traders. This extension will help tackle the UK hidden economy and eliminate the risk of overseas traders establishing a UK shell company simply to escape the existing JSL regime. This measure will come into force in the spring.
VAT number display
The government will legislate in Finance Bill 2017-18 to require online marketplaces to ensure that VAT numbers displayed for businesses operating on their website are valid. They will also be required to display a valid VAT number when provided with one by a business operating on their platform. This measure will come into force in the spring.
HMRC consulted in June 2017 on a VAT collection mechanism for online sales known as split payment, which allows VAT to be extracted directly from a transaction at the time of purchase. The government will publish a response in December.
Compliance on digital platforms
The government expects digital platforms to play a wider role in ensuring their users are compliant with the tax rules. It will publish a call for evidence in spring 2018 to explore what more can be done by digital platforms to prevent non-compliance by their users.
Making Tax Digital another step nearer
VAT to be all-digital from April 2019
The chancellor has announced the passage of enabling legislation in the Finance (No.2) Act 2017 allowing, subject to secondary legislation, for HMRC to require businesses to keep records digitally.
VAT is the only area that must use Making Tax Digital for business (MTDfB) – from April 2019. It applies to businesses with a turnover above the VAT threshold. HMRC is still piloting and testing the MTDfB service, and expects it to be available from spring/summer 2018.
We are still awaiting VAT draft legislation or other documents, and would appreciate members’ comments once these have been published.
Making tax digital (MTD) will become mandatory from April 2019 for VAT purposes only, and will apply to businesses with a turnover above the VAT threshold. For other taxes, the provisions will not begin to apply until 2020 at the earliest. MTD will be available on a voluntary basis for businesses below the VAT threshold and for taxes other than VAT. The MTD legislation will be introduced in a second 2017 Finance Bill after the summer parliamentary recess.
The Chancellor announced in the 2016 Autumn Statement that a new 16.5% rate will be available from 1 April 2017 for businesses with limited costs, such as many labour-only businesses.
HMRC has published a note explaining the VAT (Place of Supply of Services: Exceptions Relating to Supplies Made to Relevant Business Person) Order 2016, which introduces an exception to the usual VAT place of supply rules for indemnity repairs carried out under insurance contracts with effect from 1 October 2016. This means that supplies will be treated as taking place where they are effectively used and enjoyed, rather than where the recipient is located. UK repairers will have to charge VAT at the standard rate, irrespective of where the provider of the insurance cover for the goods is located.
In Inventive Tax Strategies Ltd  TC 06094, the First-tier Tribunal (FTT) dismissed the appeals against HMRC’s refusal to refund VAT, because a requirement to refund a customer is not sufficient to reduce the taxable amount and create a right to a repayment of VAT until the refund is paid to the customer, or any credit given is used by the customer.
The EU place of supply VAT rules will change from 1 January 2015. The changes impact B2C supplies including e-services. From 1 January 2015, the place of taxation for certain supplies will be determined by the location of the customer. Businesses affected by such supplies will need to adhere to new quarterly filing requirements referred to as VAT Mini One Stop Shop ( VAT MOSS).
Following its review of the CJEU judgment in ATP Pension Service, HMRC now accepts that pension funds meeting certain specific criteria are Special Investment Funds for the purposes of the fund management exemption. Management and administration services integral to the operation of such funds should therefore always have been exempt from VAT. This treatment will apply to funds containing the pooled assets of defined contribution occupational schemes as well as personal pension schemes. HMRC is still considering whether the judgment could have wider application, although taxpayers may rely directly on EU law to exempt services in accordance with this Brief pending amendments to UK legislation. Separately, R&C Brief 43/2014 sets out HMRC’s revised policy on the right to deduct input tax on these services.
HMRC has changed its position on input tax on entertaining expenses.
HMRC has changed its position relating to input tax on entertaining expenses following a case in the European Court of Justice.
Input tax on business entertaining has never been claimable since VAT was first introduced in the UK, and it has been some years since recovery of input tax on entertaining an overseas customer was also blocked.
However, following the Danfoss and Astra Zeneca case, HMRC has concluded that the UK’s block on the recovery of input tax on the business entertainment of overseas clients is inconsistent with EU law.
The block on claiming input tax on entertaining UK customers (and overseas contacts who are not customers) remains in place. But going forward, businesses can now claim the input tax incurred when entertaining overseas customers. Subject to the normal four year limit, HMRC will also now allow claims for previously restricted input tax on entertainment of overseas customers.
The VAT notice 700/65 was amended in November to reflect this change.
HMRC Brief 44/10 details this and also sets out three scenarios to help businesses to ascertain whether the input tax on entertainment costs is claimable:
1) Meetings in the office: HMRC considers that when an overseas customer is entertained in a staff canteen or similar to facilitate a business meeting, the input tax on such entertaining will be recoverable. HMRC takes the view that any private benefit derived by the overseas customer is accessory to the needs of the business
2) External meetings or events: where meetings cannot be held in house due to lack of space or facilities, the same general principle will apply as for meetings in the office, and the input tax will be recoverable. This will apply only to the basic provision of refreshments and food. If the expenditure goes beyond that, there should be a private use charge, or, alternatively, no claiming of the input tax
3) Corporate hospitality events: businesses sometimes offer customers or potential customers general hospitality, such as golf days and the like. HMRC will not allow the input tax deduction as such events are unlikely to have a strict business purpose.
Millions of workers are expected to be automatically enrolled into a workplace pension scheme for the first time from 1 October.
Employers now have to automatically enrol all UK employees aged between 22 years-old and state pension age earning over £8,105 a year and who are not already in a pension at work. Workers who do not qualify to be automatically enrolled still have the right to join their employer's workplace pension if they want.
The Government expects the reforms will mean between six and nine million workers will be brand new savers or will save even more.
Following a successful trial, HMRC have launched the Alternative Dispute Resolution (ADR) service, being a new way for small businesses and individuals to resolve disputes with HMRC.
The ADR service, which covers both VAT and direct tax disputes, uses independent HMRC facilitators from its Local Compliance SME and Local Compliance Individuals and Public Bodies business units to resolve disputes between HMRC and taxpayers during a compliance check. It aims to find a fair and quick outcome for both parties, helping to reduce their costs and avoid a tribunal.
HMRC say that entering into the ADR process will not affect the taxpayer’s existing review and appeal rights.
Although the new service will not guarantee resolution of the dispute, HMRC say that by the end of the process, taxpayers will have clarity on the outstanding issues and what happens next.
ADR is available to small business and individual taxpayers where a tax issue is in dispute, whether or not an appealable tax decision or assessment has been made by HMRC.
For a case to be considered for the ADR process, an application form available on HMRC’s website must be completed.