VAT and other indirect taxes changes in 2023

The past few years have been very eventful in Indirect Tax and, although 2023 has brought fewer changes than we have become accustomed to, we recommend that organisations continue to closely monitor their obligations as this pattern could quickly change.

The 2023 changes continue to be driven by the UK adapting its systems, processes and tax regimes to the new environment created by the UK’s exit from the EU.

While some of these changes will impact organisations across the board, others are limited to importers of goods and specific sectors.

Throughout 2023

EU’s VAT in the Digital Age (ViDA) package

The European Commission has launched its long-awaited proposals to modernise the VAT rules within the EU collectively known as ViDA. These could have a significant impact on UK organisations trading across the EU from 2025 onwards.

The ViDA proposals consist of three key parts, commonly referred to as:

The Platform economy
The Single VAT registration
Digital reporting and E-invoicing.

The ViDA proposals will ultimately require unanimous approval by all Member States to come into law. It is, therefore, expected that there will be a number of developments regarding ViDA during the coming months including a potential delay to implementation.

1 January 2023

Default surcharge changes

For VAT periods beginning after 1 January 2023, the long-standing default surcharge regime applicable to the late submission of returns and/or the late payment of associated VAT will be replaced by a new penalty regime. This will operate a points-based system where points are issued for late filing and upon reaching a threshold a fixed penalty of £200 will be levied. Penalties in respect of late payments will be calculated when payments are outstanding over 15 days and then a daily rate will be applied to any balances outstanding beyond 30 days. HMRC has indicated it will not charge the 15 – 30-day penalty for late payments throughout 2023 (unless any payment is more than 30 days late), to enable taxpayers to get used to the changes.

1 February 2023

Changes to option to tax processes

HMRC have implemented the following changes to the VAT option to tax process with effect from 1 February 2023:

HMRC have stopped issuing option to tax notification letters in response to taxpayer submissions
HMRC have stopped processing requests to confirm the existence of an option to tax apart from in limited circumstances (e.g. the effective date of the option is likely to be more than 6 years ago).

Such changes increase the onus on taxpayers to ensure they maintain accurate information regarding their option to tax position.

EU Excise Duty changes

A significant change in the process for moving excise duty paid goods between EU Member States took effect from 13 February 2023. EU Member States (and Northern Ireland) are changing from a paper-based system to using the ‘Excise Movement and Control System’ “EMCS” to track the movement of duty paid goods. Previously, this system was only used for tracking movements of duty suspended goods.

15 March 2023

Spring Budget changes announced

The Chancellor of the Exchequer provided an update on Government finances and proposals for changes to taxation on the 15 March 2023. They key changes affecting VAT and other indirect taxes announced were:

Immediate changes (with effect from 15 March) for rebated fuel (red diesel) to ease some of the strict rules around the availability and use of such fuels.
Extension of VAT relief for services carried out by staff “directly supervised” by registered pharmacists (VAT exemption) and for prescriptions to medicines supplied through Patient Group Directions (zero-rating).
Measures to make the VAT DIY Housebuilders Scheme more attractive (digitisation of offering and extension of filing time limits).
New legislation enabling HMRC to grant Advance Valuation Rulings on customs duty to organisations importing goods into the UK.
Various consultations and calls for evidence covering areas such as VAT relief on energy saving materials, VAT fund management and financial services reviews, and a consultation on wider customs reliefs.

BDO’s Budget coverage can be found here.

1 April 2023

VAT turned 50

On 1 April 2023 VAT celebrated a significant milestone being 50 years from the introduction of the tax in the UK. VAT was heralded as a ‘simple tax’ when introduced in 1973 but has proved anything but in the intervening years. There have been many memorable changes and caselaw decisions over the years which have hit the headlines.

VAT remains a key source of government tax revenue and the 50th anniversary provides the perfect opportunity to reflect on how to make sure that it remains fit for purpose for the future.

1 May 2023

Introduction of VAT-related payment scheme for the sale used cars to Northern Ireland and the EU

From 1 May 2023, HMRC has introduced the new second-hand motor vehicle payment scheme which is available where a UK VAT registered business moves a second-hand vehicle purchased in GB to NI for resale in NI or to the EU. The new scheme should put businesses in a similar financial position as if they were able to access the second-hand margin scheme.

VAT on energy saving materials in Northern Ireland

From 1 May 2023, legislation was introduced under the Windsor Framework to enable the zero-rate for energy saving materials (which applies in Great Britain) to be extended to supplies in Northern Ireland also.

VAT relief for medical services carried out under the supervision of pharmacists

Also from 1 May 2023, and in accordance with the Spring Budget announcement, HMRC has its policy in relation to the VAT exemption for medical services. It is now possible for medical services carried out by staff directly supervised by pharmacists to qualify for VAT exemption. This brings the VAT treatment into line with services supervised by other registered health professionals.

1 August 2023

Alcohol duty reforms

The Alcoholic Products (Excise Duty) Regulations 2023 have introduced a new excise duty structure meaning:

Alcohol is now taxed based on tax bands set by product type and an Alcohol by Volume (ABV) range.
The method for calculating excise duty by ABV is now harmonised for different alcohol types where previously the calculation methodology was different for beer, wine and spirits.
Concessions to standard rates are allowed for small producers and products supplied ‘on draught’ to the public i.e., in pubs and restaurants.

The updated legislation introduced new regulations which mean that the following changes will be introduced in 2024:

The arrangements for submitting excise returns and making duty payments will be updated.
The requirements around gaining approval to produce alcohol will be updated and a single type of producer approval will replace the current suite of approvals available.
The broad scope of the recent and upcoming changes means the impact of the reforms will be applicable to most businesses involved in the alcohol trade, including producers and warehouse keepers.

23 August 2023

Changes to CDS Export Completion Requirements

In late August, HMRC announced an extension to its timeline for when businesses are required to complete export declarations using the Customs Declaration Service (CDS) system. Previously, businesses were required to move over from the current Customs Handling of Import and Export Freight (CHIEF) system to the CDS system for exports by 31 October 2023.

This new timeline will be a phased approach and during the first phase, HMRC will select high-volume declarants to move to CDS for exports by 30 November 2023.

The second phase of this approach will see all other businesses move to CDS for exports by 30 March 2024.

29 August 2023

Border Operating Model

In August 2023, HMRC announced the updated Border Target Operating Model which provides information on the following three major milestones:

31 January 2024 - The introduction of health certification on imports of medium risk animal products, plants, plant products and high-risk food and feed of non-animal origin from the EU. The removal of pre notification requirements for low-risk plant and plant products from the EU.
30 April 2024 - The introduction of documentary and risk-based identity and physical checks on medium risk animal products, plants, plant products and high-risk food and feed of non-animal origin from the EU.
31 October 2024 - The requirement for Safety and Security declarations for imports into Great Britain from the EU or from other territories where the waiver applies will come into force .

31 December 2023

Trader Support Scheme

The TSS was set up to assist taxpayers with understanding the rules applicable to the movement of goods between Great Britain (GB) and Northern Ireland (NI) and to provide a portal for customs declarations to be made for the movement of goods between GB and NI. It provides support, guidance, and training, including assistance with the completion of import and safety and security declarations. The TSS has been extended to the end of 2024; however, businesses should make plans for the system to end on this date. It is possible that certain services provided by the TSS may continue after 2024 on a paid basis.

End of retained EU law

The Government’s original intention was that most remaining EU derived law in the UK (a major example of which would be the VAT legislation) was to be repealed at 31 December 2023 unless a specific decision is taken by ministers to retain an individual piece of legislation going forward. In May 2023 the Government changed its approach and announced that 600 specific retained EU laws would be revoked with a promise of a bespoke approach to Indirect Taxes. In October 2023, the Government issued a policy paper and draft legislation that will be included in the next Finance Bill. There is to be an end to the Supremacy of EU law and reliance on general principles of EU law in VAT disputes. However, in order to protect revenue and avoid costly re-litigation, the intention is for the current interpretation of UK VAT law to be retained. However, courts will have more freedom to step away from this later.