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New year, new legislation: What accountants need to know in 2021

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Throughout 2020, there were incredible challenges for businesses, and the accountancy community that supports them.

It’s not without reason that some have referred to accounting and payroll professionals as the true superheroes of the business world.

Helping businesses cope with coronavirus (COVID-19) relief measures should be seen as part of a wider trend in which accountants have increasing numbers of client advisory touchpoints.

Making Tax Digital for VAT arguably opened the door for this in 2019, and the forthcoming introduction of Making Tax Digital for Income Tax in 2023 can only help cement the role of the accountant as a true business adviser and partner for their clients.

With this in mind, below we take a look at challenges presented across 2021.

This is largely from a tax compliance point of view, and our focus is on where accountants can once again aim to provide excellent service, or perhaps even create fresh service offerings.

Here’s what we cover in this article:

Brexit requirements across 2021

Coronavirus requirements across 2021

Making Tax Digital for VAT changes in April 2021

Construction Industry Scheme (CIS) changes in March 2021

IR35 (contractor) requirements in April 2021

EU VAT e-Commerce Rules in July 2021

It’s stating the obvious to say that Brexit is where most clients directed their immediate attention when 2021 got underway.

1 January 2021 marked the UK no longer being covered by European Union (EU) laws and regulations, following the end of the Brexit transition period.

A substantial raft of laws and regulations came into force immediately, but many of the new requirements relating to issues such as import of goods or recruitment of EU nationals are staggered across 2021, and even into 2022.

Which clients are affected?

Clients who import and/or export are most likely to require expert help. They have immediately had to deal with new VAT requirements.

What do clients have to do?

Start with our guide to post-Brexit VAT for an in-depth examination written specifically for accountants.

Several government schemes aim to ease the immediate administrative requirements for import/export to the EU.

Chief among these for clients that import are deferred customs declarations (using simplified customs procedures), and postponed VAT accounting.

But there are required changes for exporters, too.

Postponed VAT can be used by businesses in the UK, and there’s no need to apply or notify HMRC in advance.

However, several of the requirements for deferred customs declarations – such as the simplified customs procedures, and duty deferment account – are not automatically applied to businesses.

They need to be applied for and authorised by HMRC, and clients may need help with this.

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.

1 April 2021 sees 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.

The coronavirus assistance provided by the government continues into 2021, and will probably be the second most urgent area after Brexit that your clients have been focusing on.

Furthermore, all eyes will be on the budget announcement scheduled for 3 March 2021, in which further relief measures could be announced.

We’ll cover these on Sage Advice at that time.

Which clients are affected?

All businesses are affected by the ongoing coronavirus disruption, of course.

But those that are continuing to use the Coronavirus Job Retention Scheme Extended (CJRS) to furlough workers, and sole traders who use the Coronavirus Self-Employment Income Support Scheme (SEISS), will probably choose to make further applications in 2021.

VAT-registered clients in the hospitality and tourism areas should be made aware the reduced rate of VAT scheme is due to end, too.

What do clients have to do?

Our coronavirus financial support timeline article provides details of what’s required across 2021 and beyond, and is a good starting point.

But sticking to 2021, clients may need ongoing assistance to apply for the CJRS and SEISS schemes in the first half of the year – although at this stage, one might suspect these applications are becoming something of an annoying formality.

The CJRS is now scheduled to stop covering employee furloughing as of 30 April 2021, following another extension from the chancellor in December 2020.

It’s not yet known when the final claim date for businesses will be.

Clients who are sole traders using SEISS should have made their first extended period claim by 29 January 2021.

The second extended period claim needs to be made after 1 February 2021, but we don’t yet know that part of the scheme will open for applications, or when the final application date will be.

VAT-registered hospitality clients using the reduced rate scheme will need to make adjustments to their accounting and point-of-sale (POS) systems to prepare for the end of the scheme on 31 March 2021.

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

Additionally, voluntary VAT-registered businesses may have to make some adaptations too in 2021 – even if they haven’t yet registered for MTD for VAT.

Which clients are affected?

There are two separate issues.

The first is that the MTD for VAT ‘soft landing’ period ends on 1 April 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.

Put simply, it means it’s no longer legal for you or your clients to cut/copy and paste to select and move information, either within a software program or between software programs, when the data relates to their VAT record-keeping, or otherwise preparing the VAT Return (although there are slightly different rules for making input/output adjustments).

The second issue as of 8 April 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.

This is used by some accounting software to communicate with HMRC computers in order to file VAT Returns.

What do clients have to do?

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. The approved list is actually very liberal. It includes emailing spreadsheets, transferring data using a memory stick, or CSV/XML import/export. But perhaps the simplest is to use MTD-compatible accounting software that takes care of it all for the client, and that links into your own software.
  • Voluntary VAT XML channel: The solution is for you or your 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, and that MTD for Income Tax also arrives in 2023.

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.

Put simply, the new rules mean those supplying construction services, that fall within the scope of CIS, and that are provided to a VAT-registered contractor, no longer account for the VAT themselves.

Instead, those employing the subcontractor have to account for the VAT as a reverse charge on their VAT Return.

Which clients are affected?

Many businesses in the construction industry are likely to be affected by the VAT reverse charge requirements, with the exception of work done on private homes for the homeowners themselves.

This is because the VAT reverse charge applies only to business transactions that fall under the CIS (between VAT-registered businesses), and the same rules regarding exemptions for the CIS effectively apply to the VAT reverse charge.

What do clients have to do?

Postponed no fewer than two times across 2019 and then 2020, the reverse charge is now due to be implemented as of 1 March 2021.

Our existing VAT reverse charge checklist and FAQ on the new requirements are two excellent places to learn about the nitty gritty of what’s on the horizon. Feel free to share the links to these guides with your clients too.

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

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

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

They’ll 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.

Another measure deferred from 2020, the extension of the IR35 rules to medium and large-sized private companies profoundly impacts contractor communities – especially in areas in such as information technology.

Which clients are affected?

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).

What do clients have to do?

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

The rules mean that medium or large-sized employers, who use the services of contractors who work through PSCs, need to determine if the contractors are disguised employees.

Such contractors work for the business in a way that means they are essentially indistinguishable from their payroll employees. They might work 9-5 hours at the business, for example, and have their own desk within the office.

If the business determines the individual is a disguised employee then they must pay them Deemed Employer Payment. That is, 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.

Small private companies are not covered by the new rules and the responsibility for determining the contractor’s IR35 status and consequently paying the right tax and NI continues to lie with the contractor.

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

This can be used by both businesses and contractors.

Some businesses are attempting to switch contractors they consider deemed employees to becoming payrolled employees, while others are reportedly simply avoiding using contractors altogether.

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.

If not then experts have suggested that contractors should consider seeking alternative work with other clients.

Note that there are a handful of changes coming on 6 April 2021 to the CIS itself. Although relatively limited in scope, they’re worth reading up on and communicating to clients.

The EU VAT e-Commerce Rules introduces several new VAT options and requirements for businesses selling to EU consumers (B2C).

Which clients are affected?

Any of your clients that sell services or goods to consumers in the EU will be affected, even though the UK is no longer in the EU.

What do clients have to do?

From July 2021, businesses selling services (B2C) that are subject to VAT in the destination country will be able to report and pay the EU VAT via a single EU One-Stop-Shop (OSS) VAT return.

Goods are also affected by the new rules, with distance selling thresholds being abolished.

As a result, all intra-community distance sales will be subject to VAT in the destination country. Sellers will also be able to report such sales through the OSS VAT return.

However, because this only applies to intra-community supplies, businesses in Great Britain (England, Wales and Scotland) will be largely unaffected because, since 1 January 2021, they have been outside the EU VAT area.

The new OSS avoids the need for businesses to register for VAT in every EU country that they sell to, although that remains an option and using OSS isn’t mandatory.

It’s a replacement for the existing Mini One-Stop-Shop (MOSS) that expands it significantly in scope to more types of supplies and therefore is available to more types of businesses.

Also part of the EU VAT e-Commerce Rules is the introduction of the Import One-Stop-Shop (IOSS).

This gives sellers the option to charge destination VAT upfront, and subsequently avoid import VAT, on B2C imports of goods into the EU with a consignment value of up to €150.

The seller will then report and pay VAT through a single EU IOSS Return (which is similar but separate from the OSS Return, mentioned earlier).

The use of IOSS makes life easier for both seller and buyer, and should expedite the movement of goods across borders.

UK sellers can use the IOSS but will first need to register in an EU state for VAT.

For sales over €150, import VAT will still be due meaning there will continue to be a requirement to register for VAT in the destination country in order to facilitate such sales.

Accompanying the above are two further measures. Deemed Seller requirements require online marketplaces such as eBay or Amazon to collect VAT on cross-border sales.

UK sellers now outside the EU VAT system selling into the EU will then recover their VAT via the Thirteenth VAT Directive, as detailed in the UK VAT Notice 723A.

Secondly, the IOSS brings with it the removal of Low-Value Consignment Relief (LVCR), which meant imports under €22 didn’t have import VAT applied.

This means all EU imports will attract VAT but to ease the process the IOSS system can be used.

Bringing clients up to full speed in 2021

There have surely been few years in recent times that have brought with them such a long list of administrative and tax requirements.

And with Brexit and ongoing coronavirus disruption, the impact on businesses and their accountants is onerous.

But as with all issues relating to compliance, business owners, operators and managers will instinctively turn to their accountant for advice and help.

This presents innumerable business opportunities to sell existing or new service offerings, or simply to earn goodwill.

Staying ahead of the information curve by gaining knowledge of all the above issues is sure to pay dividends for both accountants and clients.

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