2021: A mammoth year for tax compliance – are you ready?

Accounting and payroll professionals have been called superheroes of the business world for their incredible response to the pandemic in 2020 and for how they have helped their clients.

But 2020 could be a walk in the park compared to what is to come in 2021, with Brexit, ongoing coronavirus relief, Making Tax Digital (MTD) for VAT changes, VAT reverse charge for construction and IR35 requirements for medium-sized and larger business…The list goes on.

In this article we take a deeper look at the challenges ahead and how to prepare for them.

Brexit requirements across 2021

Brexit is where many clients directed their immediate attention as 2021 got underway.

Clients who import and/or export are most likely to require expert help with deferred customs declarations (using simplified customs procedures), and postponed VAT accounting.

Postponed VAT can be used by any business in the UK. But several of the requirements for deferred customs declarations – such as the simplified customs procedures, and duty deferment account – need to be applied for and authorised by HMRC.

Businesses in Northern Ireland can also use postponed VAT accounting. While they have no need to because of the Northern Ireland Protocol, it can be still be used for trade with countries outside the EU that aren’t the UK.

In return for a small adjustment to how they undertake their VAT accounting, this can deliver a cash flow benefit to those already importing from those countries.

The government’s new Border Operating Model introduces further key import/export requirements across the year.

April 1, 2021 will see the introduction of additional checks on Sanitary and Phytosanitary (SPS) goods. For example – see section 2.1 of the UK’s Borders Operating Model manual for more details. Remember that this government document is frequently updated.

Coronavirus requirements across 2021

The coronavirus assistance provided by the government is set to continue in 2021. Undoubtedly, it will be an urgent area after Brexit that many clients will focus on.

But all eyes will be on the budget announcement scheduled for March 3, 2021, where further relief measures are likely to be announced, or existing schemes adjusted.

The Coronavirus Job Retention Scheme Extended (CJRS) is now scheduled to stop covering employee furloughing as of April 30, 2021 – following another extension from the chancellor in December 2020. It is not yet known when the final claim date for businesses will be.

VAT-registered clients in the hospitality and tourism sectors should be aware the reduced rate of VAT scheme is due to end too. Businesses will need to make adjustments to their accounting and point-of-sale (POS) systems to prepare for the end of the scheme on March 31, 2021.

Making Tax Digital for VAT changes in April 2021

Although the majority of VAT-registered businesses implemented MTD for VAT in 2019, the adaptation journey for some businesses continues into 2021.

There are two separate issues:

The first is that the ‘soft landing’ period for MTD for VAT ends on April 1, 2021. This was the relaxation of the rules around digital linking that were intended to give businesses time to fully adapt to MTD’s requirements.

The second issue, as of April 8, 2021, is a potential change for how your voluntary VAT-registered clients, who aren’t registered for MTD, will have to undertake their VAT accounting.

HMRC is turning off a legacy, non-MTD method known as the XML channel.

Fixing both issues is a matter of outreach to clients – education and, potentially, upselling and training in new software.

• Digital linking: Instead of using cut/copy and paste, clients will need to use HMRC-approved ways of digitally linking the data. It includes emailing spreadsheets, transferring data using a memory stick, or CSV/XML import/export.
• Voluntary VAT XML channel: The solution is for clients to either manually complete VAT Returns on the HMRC website, or to register for and comply with MTD, including upgrading their software they use to MTD for VAT’s requirements. The latter is perhaps the most sensible choice considering switching to MTD for VAT for voluntary VAT businesses is legally required as of April 2022, with MTD for Income Tax also arriving in 2023.

Construction Industry Scheme (CIS) changes in March 2021

Those working in the construction industry and who use the Construction Industry Scheme (CIS) need to be aware of the VAT domestic reverse charge for construction services as of March 1, 2021.

In most cases, those employing subcontractors must account for the VAT as a reverse charge on their VAT Return.

Many businesses in the construction industry are likely to be affected by the VAT reverse charge requirements.

This is a big change for both building industry subcontractors and the contractors they work for (some businesses can be both). It will impact subcontractor cash flow because they no longer save the VAT amounts each quarter to use (legitimately) for business purposes until it is due to be paid to HMRC.

New types of invoices are required, and those who employ subcontractors have significant additional administrative requirements too.

However, it should be emphasised to clients that the VAT reverse charge rules don’t mean subcontractors can forget about VAT.

They will still have to determine when the reverse charge is to be applied and there are likely to be many situations where they will have to charge and account for VAT, due to the idiosyncrasies of the CIS.

IR35 (contractor) requirements in April 2021

Another measure deferred from 2020 along with the VAT reverse charge is the extension of the IR35 rules to medium and large-sized private companies, which profoundly impact contractor communities – especially in areas in such as information technology.

Although the new requirements affect medium and large-sized businesses, for most accountants, the work in communicating IR35 rule changes will be focused to clients who are contractors – with particular reference to those that use personal services companies (PSCs).

The new IR35 rules apply to contractor payments made after April 5, 2021 (although if the contractor’s work with the company ceased before April 6, 2021 then it falls outside the requirements).

If the business determines the individual is a disguised employee, then they must pay them Deemed Employer Payment. Therefore, they must take tax and NI out of the contractor’s payment.

They must issue a status determination statement (SDS) and keep records of contractors and the associated SDSs.

The complicated chain of fee payers, such as the use of agencies, can make issuing an SDS difficult.

To help determine the contractor’s employment status, the government’s Check Employment Status for Tax (CEST) tool should be used.

Don’t forget that this can be used by both businesses and contractors – and ideally should be used by a business with the contractor present (even if that’s just on the phone) so the questions can be answered accurately (e.g. “Do you have any other work?”).

From the point of view of contractors, they need to ensure the SDS is in place ahead of time.

They need to be communicating with all their clients to ensure that IR35 is both understood and that work is being undertaken to produce the SDS.

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