INSIGHT: 2019—the Year of Transition?

In many ways, 2019 could be seen as the year of transition.

Many U.K. and EU organizations increased preparations for Brexit and its likely impact in anticipation of the initial October 2019 deadline.

Making Tax Digital (MTD) was introduced in the U.K. by HM Revenue & Customs (HMRC) (albeit in a “light” form and not yet for all entities), and there were further developments in relation to processes and controls.

It was (Almost) All About Brexit

For indirect tax, 2019 was a year dominated by Brexit. Many organizations went through several rounds of preparations for the U.K.’s exit from the EU, only to find that the exit was deferred. These preparations included basic importer ID set-ups, through to extensive revisions of supply chains and changes in corporate structures.

Hopefully the preparations that businesses have been taking will stand them in good stead for dealing with the changes that may come in 2020, as Brexit discussions potentially reach a conclusion.

As a result of Brexit discussions, 2019 was also a year when customs duty and import and export issues became headline news. This significantly raised their profile within organizations.

Writing as an indirect tax professional, the raised profile of VAT and customs duty is welcome, as, in the past, these have been areas which perhaps did not receive as much attention within businesses as they should have. This should go some way toward mitigating unexpected VAT or customs duty costs arising as a result of weak processes and poor documentation controls.

Another development which has come as a result of Brexit focus is that many organizations carried out reviews of their existing physical and legal supply chains and identified areas of potential non-compliance or VAT inefficiencies, which they were able to take steps to rectify. This action allowed those businesses to remedy the positions with minimal or no penalty exposures.

Making Tax Digital for VAT

During 2019, HMRC introduced MTD for VAT, which resulted in a significant change in the way that VAT returns are prepared and submitted in the U.K. Organizations with a taxable turnover above the VAT registration threshold became required to keep certain VAT records digitally and to submit their VAT return data to HMRC through compatible software. The first wave of implementations took place in 2019 and seemed to pass without incident for many. Those organizations with “more complex” VAT accounting will have to file their quarterly VAT returns digitally in early 2020.

Next year will also bring the removal of the “soft landing period,” requiring digital links to be in place between the various software programs used by organizations in preparing their VAT returns.

Many commentators consider MTD to be the start of an increase in digitization in the U.K. tax regime. It is also expected that the MTD measures are just the first step in a move to a greater use of technology in VAT compliance.

Over time, we expect that HMRC will require transactional data (rather than just the basic summary totals required on the VAT return) to be provided so that real time data analytics can be applied to identify potential VAT errors and to then query those transactions. It is hoped that the use of data analytics will improve the accuracy of VAT return submissions and reduce the amount of staff time spent on manual tasks, allowing those staff members to focus on other areas which sometimes fail to make it to the top of their to-do lists.

MTD was not the only development in regard to tax processes in 2019. The year saw case law concerning penalties being applied to individual Senior Accounting Officers for incorrect statements, and more organizations responding to the Corporate Criminal Offences Act. The finance director/tax manager’s focus is increasingly on “no surprises,” and 2020 therefore promises to be a year where there is further emphasis placed on the use of technology and the processes supporting “how” an organization’s VAT figures are determined.

Other Areas

As VAT is a transactional tax, it is hard in an article such as this to highlight all the high profile VAT developments of 2019 and those expected in 2020, as many are sector specific.

For example, in the legal sector there were further developments during 2019 with the British Airways Court of Appeal decision British Airways Plc v Prosser [2019] EWCA Civ 547 adding further weight to the position adopted by HMRC in the Brabners case regarding the treatment of online property search disbursement charges. These cases, together with new guidance from the Law Society, have resulted in many law firms changing their approach to when they do and do not charge VAT on disbursement costs.

In the construction sector, the introduction of the domestic reverse charge for construction services was delayed by 12 months, so that it now takes effect from October 1, 2020. The new rules, which are an anti-fraud measure, will transfer the responsibility for accounting and paying VAT on certain supplies from the supplier to the customer. The customer has to “self-account” for VAT on their VAT return and will be able to recover the VAT subject to their usual VAT recovery position.

Many organizations had already started to plan for the changes and to implement system developments, so it is hoped that the deferral of the start date will allow extra preparation time for those who need it.

During 2019, there were new VAT voucher rules across the EU, but many organizations did not pick up on the changes. The rules amended the difference between a single-purpose voucher and a multi-purpose voucher, and result in different times when VAT needs to be accounted for. From a U.K. perspective, the rules narrow the circumstances when a voucher qualifies as multi-purpose. The voucher rules are a complex area of the VAT legislation and 2020 could well bring further developments for organizations as the new rules bed in and/or areas of uncertainty become clearer.

Finally, revised EU VAT rules in relation to intra-community sales of goods are due to take effect from January 1, 2020. These measures have been referred to as “quick fixes” and introduce amendments to four areas:

• the VAT treatment of “call-off” stock located in different EU member states;
• a simplification for the VAT treatment of goods sold through a chain involving multiple parties (“chain transactions”);
• making it a mandatory requirement to obtain the customer’s VAT number to be able to zero-rate a cross-border sale;
• a consistent approach in relation to export evidence.

At the time of writing, it remains unclear what the U.K.’s relationship with the EU will be in 2020 and beyond, meaning that many U.K. organizations may not have focused on these changes when they were first announced earlier in 2019.

Summary

The year 2019 may end up being considered to be a year of transition, given the deferral of Brexit and MTD starting to be rolled-out: 2020, therefore, promises to present many challenges for organizations in regard to complying with new rules and potentially adapting to new trading arrangements.

Organizations now operate in a world where tax is front page news and many boardrooms will be focused on ensuring that they do not face negative publicity when seeking to comply with their tax obligations.

Robert Marchant is VAT Partner at national audit, tax, advisory and risk firm, Crowe.

He may be contacted at: robert.marchant@crowe.co.uk

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.