Treasury publishes consultation on VAT refund scheme

The Treasury has published a consultation on reforms to the VAT refund rules.

Under the current VAT rules, government departments, devolved administrations, the NHS and Highways England are eligible for VAT refunds under Section 41 of the VAT Act 1994.

However, unlike commercial organisations, public sector organisations do not carry out business activities and therefore cannot reclaim VAT incurred on the goods and services they purchase.

The Treasury believes that VAT could act as a barrier to using more efficient and effective means of delivering a desired policy outcome. Section 41 was introduced to remove VAT from being a factor in decision making and enables the public sector to focus on making procurement choices that reflect true value for money for the Exchequer.

The Treasury is seeking to extend the scope of Section 41 to permit full refunds of the VAT incurred on all goods and services incurred during the course of non-business activities for those organisations currently falling within the scope of the Section.

The consultation closes on 19 November 2020 and the policy paper can be found here.

VAT cut on PPE extended

The Treasury has extended the temporary scrapping of VAT on personal protective equipment (PPE) until the end of October.

The decision comes after a temporary zero-rate of VAT was applied to PPE sales for an initial three months from 1 May to 31 July.

The government previously removed import duties from PPE and medical supplies intended to assist the NHS with the response to the coronavirus (COVID-19) pandemic.

EU law governing VAT – which the UK is bound to until the end of the Brexit transitional period – requires the UK to charge VAT on the equipment.

However, the government has acted under an exceptional basis allowed by EU rules during health emergencies. The European Commission recently indicated support for member states to introduce temporary VAT reliefs to mitigate the impact of the COVID-19 pandemic.

The latest move will particularly benefit care providers, who are often unable to reclaim the 20% VAT they incur on their purchases. According to the government, the extension of the zero-rate will save care homes and related businesses an additional £155 million.

Commenting on the VAT cut, Jesse Norman, Financial Secretary to the Treasury, said: ‘Extending the zero VAT rate on PPE will provide the relief needed by care homes in particular, so that as many people as possible continue to be protected against the coronavirus.’

2019 Spring Statement – the political reaction

Chancellor Philip Hammond delivered the 2019 Spring Statement to the House of Commons, and stated that the UK economy had ‘reached a turning point’.

The Office for Budget Responsibility (OBR), which produced the latest economic forecasts for the Spring Statement, said: ‘Economic growth in the UK and globally has slowed since the Budget in October. But tax receipts have performed better than we expected in the final months of 2018/19, and we judge that much of this buoyancy will endure.’

The Shadow Chancellor, John McDonnell, lambasted the Chancellor’s Statement, saying: ‘He’s boasting about the deficit. He’s not eliminated the deficit as we were promised by 2015. He’s simply shifted it onto the shoulders of headteachers, NHS managers, local councillors and police commissioners and, worst of all, onto the backs of many of the poorest in our society.’

Meanwhile, Caroline Lucas, Co-Leader of the Green Party, stated that the government used the Spring Statement to celebrate a ‘tiny improvement in growth’. She said: ‘GDP isn’t a real measure of our society. True indicators are people being treated in hospital corridors, and foodbank use shooting up. Our economy is designed to fail people – and it needs an overhaul.’

HMRC writes to taxpayers ahead of introduction of Welsh rates of income tax

HMRC has started to write to taxpayers ahead of the introduction of the Welsh rates of income tax (WRIT) on 6 April 2019.

From this time, taxpayers will pay the WRIT if their main residence is situated in Wales. The Welsh government will set the rates. It intends to use the money raised by the WRIT to fund public services, such as the NHS and schools.

Workers with a main residence in Wales will pay tax at the Welsh rates via Pay as You Earn (PAYE). HMRC will add a ‘C’ to the start of individuals’ tax codes so that affected taxpayers pay the correct rates.

Those who opt to file their self-assessment tax return online will be required to tick a box in order to tell HMRC that they pay the WRIT.

Commenting on the matter, Angela MacDonald, Director General for HMRC Customer Services, said: ‘We want to help people pay the right tax, so we’re writing to customers to let them know that they’ll now be paying WRIT.

‘Customers don’t need to do anything right now, but should make sure to keep HMRC informed if their details change in the future.’

Additional information on the WRIT can be found here.

AAT outlines proposals to ‘protect taxpayers from tax rises’

In a new report, the Association of Accounting Technicians (AAT) has outlined a range of proposals designed to help raise funds for the NHS without instigating tax rises.

The publication of the report comes following the Prime Minister’s recent pledge to raise £20 billion per year for the NHS by 2023/24. In response to this, the Office for Budget Responsibility (OBR) warned that tax rises will be required in order to fund NHS budget increases.

According to the AAT, its proposals would ‘raise over £27 billion’ while protecting UK taxpayers from increased government borrowing or tax rises.

Within the report, the AAT has urged the government to simplify inheritance tax (IHT); abolish the Marriage Allowance; remove higher rate tax relief for pension contributions; and switch stamp duty liability from the buyer to the seller.

The AAT acknowledged that some of its recommendations would ‘raise significant political challenges’, but stated that the proposals ‘make financial sense’.

Commenting on the matter, Phil Hall, Head of Public Affairs and Public Policy at the AAT, said: ‘AAT’s recommendations will not clear the deficit or enable investment to be showered across the country, but they do identify over £27 billion of annual savings and deserve serious consideration as a worthwhile, credible and thought-provoking contribution to the UK taxation and investment debate.’

The report can be read in full here.

Think tank urges government to abolish Entrepreneurs’ Relief

Think tank the Resolution Foundation has dubbed Entrepreneurs’ Relief (ER) the UK’s ‘worst tax break’, and has urged the government to abolish the initiative altogether.

ER is a tax relief available on the disposal of a business, and gives those eligible access to a lower rate of capital gains tax (CGT): under ER, this is charged at 10%, as opposed to 20%.

According to the Resolution Foundation, ER is ‘ineffective’, and should therefore be abolished in order to fund improvements to NHS services.

When it was first introduced in 2008, ER was expected to cost £200 million per year. The Resolution Foundation stated that spending on the relief ‘ballooned’ to over £2 billion by 2011/12, due in part to ‘increased generosity’ and ‘greater-than-expected use’. HMRC recently predicted that ER spending increased to £2.7 billion last year.

The Foundation suggested that this figure is ‘more than the entire budget’ for the UK’s intelligence services, and is enough to ‘provide £100 to each and every household in the country annually’.

Adam Corlett, Senior Economic Analyst at the Resolution Foundation, said: ‘As the Treasury wrestles with how to raise revenues to fund the Prime Minister’s pledge of £20 billion for the NHS, they should start by scrapping this expensive, regressive and ineffective tax relief.’

OBR warns tax rises will be required to fund health service spending

In its latest Fiscal Sustainability Report (FSR), the Office for Budget Responsibility (OBR) has warned that tax rises or spending cuts will be required in order to fund planned increases in the NHS budget.

The government recently outlined plans to boost its health budget partly by way of a so-called ‘Brexit dividend’ – by 2023/24, it hopes to contribute £20 billion a year to the NHS in England. However, according to the OBR, Brexit is ‘more likely to weaken than strengthen’ public finances.

Responding to the OBR’s warning, the Treasury said: ‘The government will fund this five-year commitment while continuing to meet its fiscal rules and reduce debt. Taxpayers will need to contribute a bit more in a fair and balanced way.’

Within its report, the OBR also stated that public finances are ‘likely to come under significant pressure’ in the long-term, as a result of the UK’s ‘ageing population’ and ‘upward pressure on health spending’.

The fiscal watchdog revealed that the current long-term outlook for UK public finances is now ‘less favourable’ than at the time when its last FSR was published in January 2017.

Think tank suggests UK taxpayers are giving ‘majority of their income’ to the Treasury

Think tank the Adam Smith Institute has suggested that UK taxpayers are giving more of their income to the Treasury than at any other time.

According to research published by the Institute, from 29 May 2018, employees will be ‘working for themselves’, having worked 148 days ‘just to pay their tax bill’.

Each year, the Adam Smith Institute calculates the number of days it takes the ‘average’ taxpayer to pay their taxes. For 2018, the Institute has suggested that ‘every penny’ workers earned up until 28 May went to the Treasury.

The Adam Smith Institute has therefore dubbed 29 May ‘Tax Freedom Day’ for 2018. From this date onwards, employees will get to ‘keep every penny they earn’, according to the Institute.

The research also revealed that this year’s Tax Freedom Day falls three days later than in 2017, and is the ‘latest it has been’ since records began in 1995.

Commenting on the findings, Sam Dumitriu, Head of Research at the Adam Smith Institute, said: ‘Tax Freedom Day is a stark illustration of the UK’s tax burden.

‘It is a reminder that public services such as education, welfare and the NHS must be paid for, either through taxes or borrowing – taxes on the next generation.’

IFS warns tax rises will be needed in order to sustain health service

The Institute for Fiscal Studies (IFS) has warned that the NHS will require tax rises in order to maintain the level of service it currently supplies.

In a recently published report, the IFS stated that, with an ‘ageing population’ and an increasing pay and drugs bill, individuals’ reliance on the health service will ‘only continue to grow’.

In order to sustain the NHS and fund increases in health spending, taxes would need to rise by between 1.6% and 2.6% – equivalent to between £1,200 and £2,000 per household, said the IFS.

It also revealed that funding increases of 4% per year will be required over the medium term to ‘secure modest improvements in NHS services’.

Commenting on the issue, Paul Johnson, Director of the IFS, said: ‘If we are to have a health and social care system which meets our needs and aspirations, we will have to pay a lot more for it over the next 15 years. This time we won’t be able to rely on cutting spending elsewhere – we will have to pay more in tax.

‘But it is a choice: higher taxes and a health and social care system which meets our expectations and improves over time, or taxes at current levels and a more constrained health service delivering less than we have become accustomed to.’

20% ‘sugar tax’ to be imposed in hospital cafes

The NHS is set to introduce a new 20% ‘sugar tax’ within hospital and health care centre cafes in England, in an effort to combat obesity.

Simon Stevens, chief executive of NHS England, has proposed that the new levy on all sugary drinks and snacks in NHS cafes and vending machines will be introduced in stages, and should be in place by 2020.

The new tax is aimed at deterring people from purchasing high-sugar goods, and is designed to help tackle the increasing problem of obesity.

Mr Stevens has also urged MPs to take action by forcing food companies to reduce the amount of sugar going into their products.

Despite initially voicing his opposition to the idea, Prime Minister David Cameron has now stated that he will not rule out a national tax on sugar.

Public Health England recently explored new measures to address the issue of obesity and to reduce sugar consumption, including a new levy on goods that contain excess amounts of sugar.

Mr Stevens stated: ‘Because of the role that the NHS occupies in national life, all of us working in the NHS have a responsibility not just to support those who look after patients, but to also draw attention to and make the case for some of the wider changes that will actually improve the health of this country’.

The money raised from the tax would be channelled back into the NHS, helping to improve the health of the service’s workforce.