Tax Changes: Delayed not Deleted

The phrase ‘unprecedented times’ seems to have been coined to cover so many aspects of the pandemic that the world has been facing over these past few months says Chris George, Tax Manager. 

It has been used when discussing the largest contraction in the UK economy for over 40 years.  It was used when imposing a restrictive lockdown that none of us would have thought possible six months ago, and used yet another time by the Chancellor when he introduced a measure that would see the government pay the wages of more than 9 million workers.

One further aspect may be the unprecedented level of changes to the tax system to help repay some of the additional government borrowing needed to fund the various support measures during the pandemic.  To put matters into perspective, the UK budget deficit for April and May 2020 is estimated to have £103 billion, £87 billion higher than the during the same period last year.  With the government having already said that they will not cut public services and return to the austerity seen in the aftermath of the 2008 financial crisis, it seems certain that the Treasury will be looking to increase tax receipts to help with the repaying this debt.

It is therefore important for businesses to remember that various significant tax changes which were originally due to come into effect in 2020, have merely been delayed and it is highly unlikely that they will be scrapped altogether. 

Off-Payroll Working – IR35

Originally due to come into force in April 2020, these changes move the obligation to verify a sub-contractors employment status from the sub-contractor to the business engaging them.  This is a significant change and is designed to combat the perceived under-reporting of entities which fall within the IR35 legislation.

One of the government’s aims is to make the tax system fairer for all.  Targeting those who HMRC believe are operating without paying the appropriate level of tax and National Insurance fits squarely with this aim.  Despite considerable lobbying by representatives of freelance sub-contractors, the government will not deviate from its objectives especially when tax needs to be raised.

These changes are now almost certain to go ahead in April 2021.  Both sub-contractors and the businesses who engage them should make sure they are fully ready for the implementation and should act now.  Contracts should be reviewed and clarified if necessary, and discussions between both parties should take place as early as possible. 

Construction Sector – VAT Reverse Change
This change was originally due to come into force in October 2019 but was delayed until October 2020 and has now been pushed back until 1 March 2021.

Broadly, the changes shift the obligation to pay the VAT liability to HMRC from the sub-contractor to the customer, providing they are not an end user.  For example, a property developer will not pay any VAT to their sub-contractor, but instead they will pay the liability directly to HMRC.  With the introduction of the reverse charge, HMRC are looking to reduce the amount of VAT fraud whereby the sub-contractor charges and collects the appropriate VAT from customers but then fails to pass on the VAT liability to HMRC.  This is something that has been a significant problem in VAT recovery for a number of years.

This new measure should help to reduce VAT fraud and boost takings for HMRC.  However, it will have a significant cash flow impact on sub-contractors who have often had an up to 3 months cash flow advantage between receiving the VAT liability from their customer and paying it on to HMRC.

It is vital that affected businesses do not let up in their preparations for these new measures just because they have been pushed back.  Although welcome, the delay has only brought more time for people to prepare.  With the government looking to increase tax revenue to repay borrowing, these changes are not going to go away.