The Budget Breakdown - Episode 5

In this episode, James Hurst joins Mark Morton to explore the potential changes to VAT in the upcoming budget. Drawing on over 35 years of experience in VAT, James discusses everything from VAT thresholds and electric vehicle charging to postponed import VAT accounting and the complex VAT treatment of taxi services. With a mix of practical insight and policy speculation, this episode is essential listening for anyone navigating the evolving VAT landscape.

For more information on this topic and more, please visit www.mercia-group.com for further details.

Transcript

Mark Morton: Hello everybody, it's Mark Morton here.

The latest in a series of podcasts leading up to the budget.

The speculation continues and if you read the headlines, it's gonna be bad.

It's gonna be really bad.

There's gonna be tax rises.

We will see the next area that we thought we'd focus on.

Is VAT.

One of the holes in my HMRC training is our VAT training got as far as what VAT actually stood for and no further.

So because of my huge lack of knowledge in this area, I thought I would defer at this stage to somebody who has spent a lifetime dealing with biscuits, cakes and everything that goes with VAT.

I will hand over to my esteemed colleagues, James Hurst.

Who will consider what may or may not be happening as regards to that in the budget?

Over to you, James.

James Hurst: Thank you, mark a lifetime in VAT you say, it is certainly 35 years since I first joined.

What was then?

Customs and Excise.

So is that a lifetime in VAT?

I guess so.

Some might say a life sentence, but anyway, moving swiftly on what that time spent working in VAT does tell me.

Is that predicting VAT announcements is fraught with difficulty.

We only have to cast our minds back to early 2024 when there was an announcement of an increase in the VAT threshold to 90,000, if you remember.

But only four months prior to that, the then Chancellor of the ex checker had assured us that the VAT registration threshold would remain at 85,000 for at least the next two years or so.

So it is, you know, of course it's very difficult to predict this time there's been quite.

A lot of chats, relatively speaking, I would say about VAT changes or potential VAT changes rather some of which I think are more speculative than others.

So I thought in terms of sharing my thoughts with you, mark, I would begin with some of the perhaps less speculative points that are being made.

The first one around charity donations.

We had a consultation earlier this year.

About removing a rather odd distinction between there being no supply for VAT when a business makes a donation of goods to a charity for onward sale by the charity, but there is a supply for VAT when the donation of goods to the charity.

Is goods that are then donated by the charity.

And that seems a bit of an odd distinction, and I would've thought, sure, it's not too difficult to amend the law, and I think that would be generally welcomed.

There's also been talk about equalizing the treatment of electric vehicle charging points at the moment if you charge your vehicle at home.

You are likely to pay 5% VAT on a supply of domestic fuel and power.

But if you charge your electric vehicle at a public point, you'll pay 20% VAT for the privilege.

You know, maybe encouraging greater.

Electric vehicle use by reducing the VAT costs.

There may, maybe that wouldn't be too difficult to do, and it does seem rather anomalous.

There's lots of chat about changing the VAT threshold.

It again, notwithstanding that it went up only in April, 2020.

Four.

Some say that raising the VAT threshold significantly could help smaller businesses by taking more smaller businesses outta the VAT net when the registration of the was threshold was changed back in.
  2024, they estimated that would enable some 28,000 small businesses to no longer be registered for VAT.

So could you have the same effect again and would that help struggling smaller businesses?

You know, that might be the case, but equally there are plenty of other commentators say that we already have a much higher threshold than is the norm in other places.

Certainly across the eu, we're a bit of you know.

When we were within the eu pre Brexit, we were an outlier in the u UK because our VAT registration threshold was much higher than the norm in the rest of the eu.

And that differential is still the case.

And so there is a strong argument equally that what you should do is actually.

Significantly reduce the VAT threshold to in a sense, unless you're a micro business, everyone is subject to VAT, everyone is it within that VAT club as it were?

And therefore there's no cliff edge effect.

When a business reaches the 90,000 threshold and has to be registered for VAT and it see, sees its net income go down, and there is a school of thought that actually that higher threshold acts as it.

A disincentive to growth so that businesses will deliberately keep below the threshold so that they don't have to register for VAT.

So if you make everyone register for VAT, that takes that barrier away.

That said, I've seen references to some detailed research that says that reducing the threshold significantly works best if you also lower the standard rate of VAT at the same time.

And so there's certainly merit to that argument, but.

I would say that sounds like a big, bold change for a government to do both of those things together.

Personally, I think there's more likely to be a bit of tinkering at the edges rather than a major change like that.

There's been talk and a certain amount of lobbying I would say, through the press in terms of ending the exemption for private medical care.

Personally, I think that's unlikely, if only because HMRC seemed to have been very effective over the last couple of years with a project they've run to try and limit the scope of the exemption for medical services to truly medical treatments and ensure that on the other hand, cosmetic and elective treatments are standard rated HC one.

Virtually all of the cases that have appeared at the VAT Tribunal over the last couple of years they've only lost like one or two cases really.

And I kind of think also, would the government really want to risk making private healthcare more expensive?

For patients and drive them away from it into the NHS when at the same time the government is clearly working hard at trying to reduce NHS wasting times.

And so I personally, I think that's unlikely.

There's also I've seen discussion around whether the government should remove EA on domestic fuel and power, you remember, currently it's charged at 5% VAT on supplies of domestic fuel and power.

So on the one hand, I think that could be good news for households, particularly as we enter winter.

You'll see money knocked off your household heating bill.

On the other hand, the 5% VAT is a kind of flat rate percentage that applies to all domestic fuel and heating.

And so who would be the bigger winners from this?

It would be the people with the biggest heating bills, which are likely to be the wealthier people who could afford to turn their heating up and who live in the biggest houses one imagine.

So that to me doesn't sound very progressive, that in purely cash terms, you give a, a.

A bigger cash saving to the wealthier people in society rather than the less well off in, in society.

So politically, I'm not sure whether that stacks up, but maybe if you use those receipts from, the 5% that's charged on domestic heating and put that money into something else such as the cap on heating bills or whatever may, maybe that would work better politically.

And then I'm gonna finish with a couple of thoughts that are.

Possibly a little bit more out there, if I can put it like that.

One, one discussion I saw concerns postponed import, VAT, accounting.

And this has been really, I would say, a tangible VAT benefit of Brexit since January, 2021.

If you're an importer, you no longer have to pay import VAT up front in order.

To get your goods released by customs and then recover that import VAT later on in a VAT return.

You always had a cashflow cost of paying out the VAT first and recovering it later.

And.

Then we've had postponed import, VAT accounting, where you just account for the import VAT and recover it in the same VAT return.

So for most importers, there's a ne net cashflow impact, so that's much better.

Then I saw some comments about why doesn't the government get rid of this postponed import VAT accounting and then just revert to the old system?

And that would certainly create a cashflow cost again for businesses.

But with the benefit of giving a one-off cashflow boost to the treasury.

So it's hard to say how much is is involved here, but looking at the C's annual reports and accounts, it's certainly the amount of VAT involved in postponed import.

VAT accounting seems to be at least around the 30 billion marks.

So wouldn't it be tempting for the treasury to try and claim a one-off cash flow boost?

And they could rightly say we're not putting VAT up.

You know, and tinkering with the rate of VAT and keeping to our election promises.

And then my final thought again, you know, this might seem a bit radical, but there is precedent for this.

As I'll explain there's been lots of litigation going on over the last couple of years, in particular about private hire vehicle operators.

So here we, we think the likes of mini cab operators and and those who run apps.

So it's the likes of Uber and Visa and Delta and others.

Similar operators and there's a lot of VAT litigation going on about different points.

And there was a also a big consultation by ex excise undertaken by HMRC last year, pointing out the fact that the VAT position is inconsistent with the regulatory position.

And in fact, the regulatory position is as to whether someone can act as.

Agent or principal, if you're an operator, that's different in different parts of the constituent parts of the uk.

So you get this like pretty I would say unsustainable position at the moment.

The potentially you've got different VAT treatments going on depending on where you're operating within the UK and whether you are able to get away with.

Operating a, an agency model or acting as principal, whether you're a self-employed taxi driver who's trading below the threshold and so on.

So sometimes there's VAT on fares.

Sometimes there isn't.

It depends whether you get a sort of black cab type taxi or a mini cab and so on, and doesn't it seem a bit of a nonsense that the VAT treatment is so inconsistent?

You know, there was talk about, you know, maybe you just remove VAT on all sort of taxi faires.

That would be quite costly, I would say, for the treasury.

And they're not particularly in favor of that based on all of the comments that they've made during the consultation, or do you add VAT to all of them?

How do you do that?

You know, if it, maybe there's a way of ensuring that VAT could be on all sort of, mini cab type fares, like the likes of Uber and so on.

But what about the black cabs where traditionally that hackney carriage type taxi.

You've got a self-employed driver who typically is trading below the VAT threshold and isn't registered for VAT, you know, how do you bring them within the VAT net?

This is my final thought is a bit off the wall, but there is precedent for this, as I say, and that's if we look at Australia.

You know, in a developed economy such as Australia.

They have not VAT, but they have a goods and sales tax.

So there's a sales tax at the consumer end of things.

And if you are a supply, you've got a register and the registration threshold is 75,000 Aussie dollars.

There's a higher threshold if you're a not-for-profit, but if you are someone who supplies taxi services or mini cab type services or limousine drives and anything like that, the registration threshold is nil.

So from day one, when you start operating like that, you've got to account for tax on your faires.

So is it too radical to say that the government would not change the rate of VAT or change the threshold, but actually bring in a different threshold for certain types of service or goods?

And in my example here.

Sort of, mini cab type services.

So I'll leave you with that particular thought.

I'm James Hurst at Mercia, and thank you for listening.