Value Added Tax and indirect taxes

Rates and thresholds

The standard rate of VAT remains at 20%. For a table of the main tax rates and allowances for 2023/2024, click here.

The VAT registration (£85,000) and deregistration (£83,000) thresholds will not change. In particular, the government has previously announced that, on the basis of the recommendations of the Office of Tax Simplification (OTS) concerning the distortions created by the high registration threshold in the UK, the registration threshold would be frozen until April 2024.

VAT treatment of fund management fees

The government’s consultation on proposed reform of the VAT rules on fund management to improve legal clarity and certainty closed in February 2023. The government has indicated it is considering the responses and continuing to discuss the proposals with interested stakeholders. The government will publish its response to the consultation in the coming months.

VAT review of financial services

The government has announced that, building on the recommendations of the industry working group established to consider the future of VAT and financial services, it will continue working with industry stakeholders to consider possible reforms to simplify the VAT treatment of financial services, reducing inconsistencies and providing businesses with greater clarity and certainty. Given the significant interest in extending zero rating to certain financial services, in particular fund management, it is somewhat disappointing that there is no further clarity on the proposed direction of travel.

Energy saving materials VAT relief consultation

The government has published a consultation which seeks to build on its commitment, made in the 2022 Autumn Statement, to support improvements in energy efficiency in order to reduce energy bills across households, businesses and the public sector.

Since 2000, reduced rate VAT of 5% has applied to the supply and installation of certain energy saving materials (ESMs) in residential buildings (and, for some periods, buildings used for relevant charitable purposes). In 2022’s Spring Statement, the government expanded the relief in Great Britain by introducing a temporary zero-rate on the installation of ESMs in residential accommodation until 31 March 2027, and re-expanded the list of ESMs falling within the scope of the relief (the list of qualifying materials having changed over the years). Currently, the zero-rating applies to materials such as insulation, solar panels, ground and air source heat pumps, wood-fuelled boilers and wind and water turbines amongst others.

The call for evidence published today seeks views on two potential areas for further reform of the VAT relief on ESMs, namely:

• the energy saving materials within the scope of the relief; and
• the potential re-introduction of the relief for the installation of ESMs in buildings intended solely for a relevant charitable purpose,

in order to help meet the objectives of the ESM relief to improve energy efficiency and reduce carbon emissions in a cost effective way.

The consultation invites views specifically on whether electrical battery storage should be brought within the scope of the relief, as well as more wide ranging input on other new technologies to be brought within scope, and any technologies currently within scope which should be removed.

Importantly, as well as considering the scope of the reliefs, the consultation seeks views on how access to reliefs can be more effective and efficient.

It also asks whether, post-Brexit, the government should consider re-instating relief for the installation of ESMs to buildings used for ‘relevant charitable purposes’. The consultation closes on 31 May 2023.

In addition to the call for evidence itself, the government has indicated that the Windsor Framework agreed recently will mean the 2022 Spring Statement expansion of the relief, as detailed above, can apply in Northern Ireland.

Overall, this can only be a positive step in the right direction for businesses and for climate change. It’s encouraging that HMRC are not only looking at the scope of the reliefs, but also the accessibility, which is equally important to incentivise change.

VAT and medicines and pharmacists

The government has announced that it will legislate to extend the VAT exemption for healthcare to include services carried out by staff directly supervised by registered pharmacists in the UK. The changes will take effect from 1 May 2023.

In addition, the government will extend the zero rate of VAT on prescriptions for medicines supplied through Patient Group Directions. This measure will be introduced in autumn 2023.

Late payment interest, late payment penalties and repayment rules

Some minor, technical changes have been announced in relation to late payment interest and penalties.

From 15 March 2023, where HMRC assesses a taxpayer in order to recover a VAT overpayment that HMRC themselves have made, the taxpayer will now be charged late payment interest from the date of the overpayment by HMRC, rather than from 30 days following the date of assessment, as is currently the case. The taxpayer will not be prevented from accruing repayment interest if they fail to comply with a requirement to provide evidence to HMRC.

From 1 January 2023, taxpayers using the VAT Annual Accounting Scheme will no longer be charged late payment penalties or late payment interest on instalments paid late, although such penalties and interest will continue to apply to balancing payments.

Given that these changes will be effective from 2023, there should be limited impact on taxpayers currently in dispute with HMRC on these matters.

VAT accounting for drink deposit return schemes

New VAT accounting rules have been introduced for businesses making supplies within the Drink Deposit Returns Schemes. These schemes require a deposit to be charged at each stage of the supply chain – with the deposit first being added to the price of the drink when it is first sold in the UK by the manufacturer or importer, and then on any subsequent onward sales by retailers. Such deposits are refunded if the container is returned.

Existing VAT accounting rules mean that VAT is chargeable on the price of the drink, including the deposit, with VAT being adjusted in the event that the deposit is refunded to a customer to ensure that the net VAT paid to HMRC reflects what has actually been paid by the consumer.

The measure announced effectively removes the need to account for VAT at each stage of the supply chain, and will instead place the accounting burden on the manufacturer or importer who first sells the drink in the UK. They will be required to account for VAT on the value of the deposits of drinks containers which have not been returned and the corresponding deposit refunded. This will be achieved through a periodic VAT accounting adjustment.

The measure is expected to take effect from 1 August 2023 following the approval of the Spring Finance Bill 2023 and related statutory instruments.

These changes may come as no surprise as they were announced in a factsheet from HM Treasury to the Scottish Government in February 2023. Together with the introduction of the change later in the year (from 1 August 2023), HM Treasury are confident that this should have given businesses enough time to make the necessary systems changes.

Customs Advance Valuation Rulings

Measures will be introduced in the Spring Finance Bill 2023 which will enable HMRC to grant Advance Valuation Rulings (AVRs) to customers importing goods into the UK. AVRs are legally binding written decisions made by customs authorities such as HMRC, at the request of the trader, in order to provide certainty to traders on how they should arrive at the customs value for their goods (such value impacting the amount of customs duty that may be due). It is intended that any AVRs given will bind HMRC and the trader for a three year period in relation to the goods and importation scenario in respect of which it is given, subject to withdrawal of the ruling

Whilst HMRC currently issues advance rulings on tariff classification and goods origin, there is currently no provision to do so on valuation in the UK, despite it being commonly offered by other customs authorities globally. In introducing AVRs in the UK, the government considers the UK will be better able to meet the requirements of its Free Trade Agreements, and will assist in the UK’s accession to the Comprehensive and Progressing Agreement for Trans-Pacific Partnership.

The measures will be introduced through amending the Taxation (Cross-border Trade) Act 2018 and issuing a Notice with force of law to cover matters including:

• cases where rulings are and are not required;
• how an AVR application should be made;
• the timeframe for applications to be determined;
• the effective period of the rulings;
• the form of the rulings;
• how rulings could be withdrawn or amended; and
• the extent of traders’ reliance on the AVR.

It is hoped that, given the AVR application process is expected to replicate that already in place for tariff and origin rulings, there are minimal issues getting the application process up and running.

The introduction of AVRs should be welcomed in order to give importers greater certainty and clarity on any customs duty to be borne.

Insurance premium tax (IPT)

The IPT Regulations 1994 incorporate six forms for use by taxpayers to provide certain information. Currently any changes to those forms require secondary legislation. The government has announced that changes will be made to enable HMRC to make amendments to the forms by publishing a notice in order to simplify the administration of the tax. It will have effect from the date the Spring Finance Bill 2023 gains Royal Assent.

Landfill tax rates (LFT)

The standard and lower rates of LFT will increase for taxable disposals that take place or which are treated as taking place on or after 1 April 2023 in line with RPI as follows:

• Standard rate: £98.60 to £102.10 per tonne
• Lower rate: £3.15 to £3.25 per tonne.

Landfill tax reform

HM Treasury has published a summary of responses to its recent call for evidence on landfill tax reform.

The call for evidence was wide-ranging and suggests significant changes are likely to be made to the landfill tax regime. We will write further on it in due course. Key matters addressed include:

• Waste crime: respondents recognised that waste crime remains a major problem. The responses diagnosed a wide range of causes: the significant difference between the lower and standard rates of tax; the prevalence of illegal landfill sites; and perceived weakness in enforcement. Equally, a number of solutions were proposed: better inter-agency working with HMRC, the police, the Environment Agency, DEFRA, and the National Crime Agency; more effort to tackle unauthorised dumping; and public information campaigns. This broad list of problems and solutions goes to highlight the challenges in effectively tackling waste crime.
• The lower rate of landfill tax: there was generally broad support for reconsidering the way in which decisions about which materials attract the lower rate of landfill are made. The main focus of any such change would be focusing on whether materials can be moved ‘up’ the waste hierarchy – for example, by recycling. That might mean that some materials that presently attract the lower rate, like glass, could move to the standard rate, and other materials that attract the standard rate, like asbestos, might move to the lower rate.
• Exemptions: the consultation asked a number of questions about exemptions for filling quarries, for mining and quarrying, and for dredgings. A broad theme arising from the responses was a need for greater clarity in the legislation and limited support for changing the way in which these exemptions worked. In the case of the quarry filling exemption, the responses highlighted the difference between the approach taken by the industry (which looks on the exemption as a way of keeping landfill tax out of the restoration process) and HMRC (which looks at an exemption to the general rule that disposals of waste should be taxed, so wants to guard the boundaries of the exemption closely). For dredgings, consultation responses focused on the material that is added to the waste to dehydrate it. We expect to see further ‘anti-avoidance’ changes to the legislation on the various exemptions.
• Water discounting: there was general agreement among respondents that the water discounting regime would benefit from tightening: the review process was seen to be relatively weak and HMRC’s relationship with the Environment Agency somewhat disjointed.

The summary concludes with a promise that the government will consult with stakeholders before making changes.

Landfill tax (LFT) grant scheme

The Department for the Environment, Food, and Rural Affairs (DEFRA) has been consulting on a grant scheme designed to address the ‘landfill tax trap’.

The ‘landfill tax trap’ describes the problem that landfill tax can be a significant cost in remediation of land. For example, converting former industrial land for use as a public park probably requires the removal and treatment, and possible disposal, of meaningful amounts of soils and construction materials. Any disposals of that material attract landfill tax. But landfill tax was explicitly designed to deter disposal of waste at landfill by increasing its costs relative to other means of managing that waste. The ‘trap’ is that this deterrent tax is also blocking remediation or redevelopment of brownfield sites.

DEFRA’s proposal to address this problem is to offer grants to discharge the landfill tax liability of those carrying out remediation of certain land.

The responses to the consultation, and DEFRA’s summary, suggest that:

• a ‘grant’ scheme would be very popular;
• it is likely to be offered exclusively to local authorities;
• the scheme may be available even where the site will not be redeveloped if so doing would have wider economic, environmental, or social benefits: for example, cleaning up a former landfill site for environmental health reasons.

Aggregates levy

The government has announced that it will freeze the Aggregates Levy rate in 2023/2024. The government will also legislate in Finance Bill 2023/24 to increase the Aggregates Levy in line with RPI. The change will take effect from 1 April 2024.

In addition, two changes have been announced to the current exemptions from aggregates levy.

Currently aggregate that is returned unmixed to the site from which it was won is not subject to the levy. This means that aggregate extracted from ‘borrow pits’ located within the site boundary and used in construction works on the same site is not taxed, whereas commercially produced aggregate is taxed. Following the changes, only aggregate that is returned to the site for a purpose that is connected to winning aggregate (e.g. building haul roads) will be outside the levy. Aggregate that is extracted from an on-site borrow pit for use in construction works will be taxed in the same way as aggregate from other sources.

Existing exemptions for ‘unavoidable aggregate’ that results from certain specific processes (laying foundations, pipes or cables at a building site; building or improving a highway, railway, tramway or monorail; and certain other streetworks) will be replaced with a broader exemption for unavoidable aggregate that results from the construction or improvement of any (a) structure or (b) infrastructure relating to transport or utilities. The change is being introduced in response to concerns raised by the water industry that the existing exemptions did not apply consistently to by-product aggregate from laying underground pipes. Rather than add to the existing list of specific processes, it was decided to simplify the tax by replacing the existing exemptions with a more general exemption for by-product aggregate from construction projects.

The measures will take effect from 1 October 2023, to allow time for businesses affected by the borrow pit change to register for the tax. The Exchequer impact is expected to be negligible.