After a record breaking, roller coaster year in 2020, what can we now expect in 2021? After so much rapid unpredictability, there are now some things we can count on with more certainty. Here we examine what we know so far.
A Rise in National Living Wage from 6 April 2021
The national living wage will be extended to 23 and 24-year-olds for the first time, from April 2021. Previously it only applied to workers aged 25 and over. This rate will revive a 19p increase, from £8.72 to £8.91 per hour. This represents a 2.2 per cent rise, in line with inflation. The original plan was for the living wage to increase by 5.6 per cent, to £9.21 per hour. Boris Johnson pledged to give the lowest paid their “biggest ever cash boost” during the 2019 general election. However, the Low Pay Commission advised the Chancellor to make a U-turn on this, saying it would have a negative effect on businesses already struggling to stay afloat during the Covid-19 pandemic.
New hourly rates recommended by the Low Pay Commission and accepted by the government will be:
Age 23 or over (national living wage rate): GBP 8.91 (up 2.2% from GBP 8.72)
Age 21 to 22: GBP 8.36 (up 2% from GBP 8.20)
Age 18 to 20: GBP 6.56 (up 1.7% from GBP 6.45)
Age 16 to 17: GBP 4.62 (up 1.5% from GBP 4.55)
Apprentice rate: GBP 4.30 (up 3.6% from GBP 4.15)
IR35 will come into force on 6th April 2021
On 17 March 2020, HM Government announced that IR35 changes planned for private sector contractors would be postponed for a year in response to the Government’s Coronavirus business support package. The one year delay now means IR35 will take effect from April 2021 instead of April 2020. This “last-minute” delay would help the economy during the Covid-19 pandemic and thereafter, the Government argued. Despite mounting opposition, the government used its majority to pass the legislation through in this year’s Finance Act, seeing off any further delay. The new IR35 rules are now ‘locked-in’ which means the overwhelming likelihood is they will come into force as the government intends.
Making Tax Digital will be enforceable from 6 April 2021
Making Tax Digital (MTD) makes it mandatory for businesses to keep digital accounting records and complete their VAT submissions to HMRC via an Application Programme Interface (API), utilising MTD compliant software. This is what to expect from postponed MTD. HMRC will expect full compliance from businesses by keeping digital accounting records by April 2021. The roll out of MTD Phase 2 was postponed until April 2021 to allow businesses the breathing space to concentrate their limited resources and cash flow on surviving the COVID-19 crisis. We still expect to be told when the new MTD Phase 2 timeline will be finalised. HMRC will expect full compliance from businesses, to reaccrue tax revenue which was decimated during the pandemic, by the time that the soft landing period elapses.
The introduction of a new points-based penalty regime for VAT, scheduled for 2020, will enable HMRC to automatically award points and financial penalties. It signifies the tax authority’s intentions to ensure penalties are awarded fairly and proportionately but also more frequently and effectively through the use of automated systems. When it comes to adjustments to your digital business records, “only the total for each type of adjustment” are required to be kept in the MTD software “not the details of the calculations underlying them” so calculations do not need to be recorded. You also do not need to amend the digital record of a supply where the input tax claimed or output tax due on a supply has been changed as the result of an adjustment or error. One of the objectives of MTD is achieving tax efficiency and streamlining systems. The government has consistently focused on its efforts to make HMRC one of the most digitally advanced tax authorities globally. Technically you can become compliant using an API-enabled spreadsheet, but this will expose the business to the errors synonymous with this form of record keeping and therefore poses a higher risk of investigation and penalties from HMRC. They will expect you to make every effort to comply. Provided you can demonstrate you are attempting to comply and give a good reason for your inability to do so, you can apply for an exemption. Exemptions will be considered on the basis of you having complex or legacy IT systems that will take time to adjust or if you have acquired another business, for instance. However, even if HMRC awards you a “specific direction” i.e. an alternative deadline, you will still need to actively demonstrate you intend to comply while awaiting their decision and during the extended period.
VAT Reverse Charge will come into effect for the Construction Industries on 1 March 2021
The Construction Industry Scheme (CIS) VAT reverse charge will come into force on 1st March 2021. The CIS VAT reverse charge was due to commence in October 2019, but this was delayed twice, firstly as a result of Brexit and then the outbreak of COVID-19. The construction industry reversed charge will apply to supplies of construction work in the UK. When the reverse charge applies the customer accounts for the supplier’s output VAT. This measure only applies to construction supplies made by a business to business. What the CIS VAT reverse charge means, is that the customer receiving the service will have to pay the VAT due to HMRC instead of paying it to the supplier. It will only apply to individuals or businesses registered for VAT in the UK. The reverse charge will affect supplies of building and construction services supplied at the standard or reduced rates that also need to be reported under CIS. These are called specified supplies. There is an important difference between CIS and the reverse charge where materials are included within a service. The reverse charge applies to the whole service whereas CIS payments to net status sub-contractors are apportioned and no deductions are made on the materials content.
How to prepare for the Construction Industry Reverse Charge
- Make sure your accounting systems and software can deal with the reverse charge
- consider whether the change will impact your cash flow
- make sure all your staff who are responsible for VAT accounting are familiar with the reverse charge and how it will work
- If the VAT reverse charge does not apply you should follow the normal VAT rules. The government has provided flow charts to help you decide if you need to use the reverse charge, which you can view and download here.
Whilst certain an initial “bounce back” of economic growth will follow any safe removal of COVID-19 restrictions, the Treasury’s goal of ensuring robust, long-term, and sustainable economic growth will require much work and good policy choices.
Tax reform is one of the main areas on which the government can focus with the aim of boosting the economy in the long term. Implementing sustainable improvements to the tax system should attract new International business and investment, encourage domestic entrepreneurship and productivity and eliminate costs that stifle growth. Tax reform is not the only course of action, but it is one of the most impactful the government has under its control.
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