VAT changes for 2021

This is our overview of VAT changes coming into effect in 2021, including those related to COVID-19, Brexit and Making Tax Digital.

In 2020, several important changes were made to VAT in response to COVID-19. They include VAT payment deferrals, a reduction in VAT rates for the hospitality and leisure industries and HMRC’s revised view on the treatment of compensation/termination payments.

1 January 2021: VAT changes due to Brexit come into effect

On 1 January 2021, changes were made to the VAT rules for transactions between the UK and the EU.

If you import goods or services from the EU

Existing rules on imports from non-EU countries will now apply to imports from the EU, although there have been some changes.

•  ‘Postponed accounting’ has been introduced for goods brought into the UK from EU and non-EU countries. VAT-registered businesses that import goods to the UK can now account for VAT on receipt of the goods on their VAT return. They don’t have to pay VAT when the goods arrive at the UK border, or when the invoice is issued.

• UK businesses can register to open a duty deferment account with HMRC so that customs and excise duty payments can be deferred to be settled monthly. This requires a bank guarantee.

• VAT on imported goods worth up to £135 will be collected at the point of sale and not the point of importation. They will be subject to UK sales VAT (known as supply VAT) and not VAT from the country you import from. Business-to-business sales under £135 are also subject to the new rules.

• Online marketplaces that sell imported goods must collect and account for VAT. That applies even when the goods are in the UK when they’re sold.

If you export goods or services to the EU

From 1 January 2021, goods and services entering the EU from the UK will largely be treated the same way as goods entering the EU from non-EU countries, with some exceptions that apply to specific services. UK businesses need to prepare for the following changes:

• Any import VAT and customs duties (tariffs) due must now be paid when the goods reach the EU. VAT-registered UK businesses that sell to EU businesses will still be able to zero-rate their sales.

• UK businesses with up to £70,000 of sales to the EU used to benefit from distance selling thresholds and were subject to UK VAT. From 1 January 2021, these sales will count as zero-rated exports instead.

• UK-registered businesses exporting zero-rated goods to EU businesses must keep evidence to prove that the goods have left the UK. 

• Only businesses in Northern Ireland will still need to complete the EC Sales Lists for their exports to the EU - other UK businesses are now exempt from that.

• UK businesses may be able to defer import VAT and customs duties until goods reach their final destination using the Common Transit Convention (CTC). A guarantee to cover VAT or customs duties while the goods are being moved may be required.

• All digital services supplied to the EU are liable for VAT in the country of the consumer. The £8,818 annual threshold for sales of digital services to EU consumers no longer applies. UK businesses will have to charge VAT at the rate that applies where the customer is based and sales must be declared to that EU country. 

• Businesses that want to continue using the UK VAT MOSS union scheme must also register for the VAT MOSS non-union scheme in an EU country. They should register for the scheme by the 10th day of the month after their first sale to the EU is made. For example, the deadline would be 10 February 2021 for a sale made in January 2021.

1 March 2021: Domestic reverse charge for construction services comes into effect

This change, originally scheduled for October 2019, will overhaul the way VAT is charged on building and construction invoices.

Once the changes come in, customers receiving building services will have to account for the VAT to HMRC rather than to the supplier. The reverse charge aims to reduce VAT fraud in the construction sector. The Supplier does not charge any VAT but needs to state on the invoice that it is subject to the VAT domestic recharge scheme and state the VAT rate and/or value that would normally apply. The deductions under the Construction Industry Scheme are still applicable.

The changes will apply to construction services. That will include businesses that are involved in:

• alterations, repairs and decorating

• demolition and dismantling

• building work

• site preparation, e.g. laying foundations and providing access works

• installation of heating, lighting, power, water and ventilation systems

• cleaning of buildings after construction work

Ahead of 31 March 2021: Taxpayers need to opt in for deferred VAT repayments

Businesses that chose to defer their VAT payments between 20 March 2020 and 30 June 2020 must pay the deferred VAT in full by 31 March 2021. Alternatively, they can opt in to the new payment scheme by 21 June 2021. That will allow them to make the repayment in monthly interest-free payments. The full amount must be paid by 31 March 2022.

Find out how to join the VAT deferral new payment scheme.

30 September 2021: Reduced VAT rate for hospitality, holiday accommodation and attraction businesses ends

In mid-2020, the VAT rate for hospitality, holiday accommodation and attraction businesses was reduced from 20% to 5% to support businesses severely affected by COVID-19. In the budget on 3 March 2021, the government announced that the temporary reduction would be extended until 30 September 2021.

From 1 October a new interim rate of 12.5% will then apply for a period of 6 months before returning to the standard rate of 20% from April 2022.

1 April 2021: ‘Digital links’ become a requirement in the next step towards Making Tax Digital

From 1 April 2021, the option to submit VAT returns via XML is being removed from the HMRC website. All VAT-registered businesses that are signed up for Making Tax Digital for VAT must now put ‘digital links’ in place. In April 2019, a ‘soft landing period’ was granted that gave VAT-registered businesses with an annual taxable turnover above £85,000 12 months to get their systems digitally linked. That was extended for another 12 months in April 2020 due to COVID-19. However, UK businesses that haven’t done so yet must now act quickly to put digital links in place.

From April 2022, VAT-registered businesses with an annual taxable turnover below £85,000 must also use digital links for their VAT return. For those who are still submitting their VAT return in the old way, it makes sense to start using Making Tax Digital software now to avoid problems later.

Read more about what digital links are and who they apply to.

1 July 2021: Changes to VAT on cross-border B2C supplies are expected

Changes to VAT on cross-border B2C supplies due on 1 January 2021 were postponed until 1 July 2021 due to the difficulties created by COVID-19

From 1 July 2021, new rules will apply that make it easier to account for local VAT where the consumer is based. The rules will apply to EU suppliers and suppliers outside the EU, including in the UK.

Managing the VAT changes made easy

QuickBooks’ VAT software automatically reflects changes in the amount of VAT you owe and reminds you when it’s due. Scan your return using the VAT error checker, then submit your VAT directly to HMRC in time for the deadline. That’s the easy way to make sure your VAT obligations are met.