I am writing to you in relation to HMRC’s proposed approach to VAT compliance and what a “soft landing” might look like given the new trading rules in operation since the end of the Brexit transition period.

As you are aware, in recent months, this Institute’s Public Policy and Tax team has been engaging extensively with HMRC on behalf of our members with discussions taking place on a wide range of EU exit related issues including the changes to accounting for VAT in Northern Ireland (“NI”). We very much welcome that engagement which continues in 2021.

During this time, we have also discussed HMRC’s proposed approach to VAT compliance with these changes and what a “soft landing” might look like. It is very clear from our discussions that HMRC is fully aware of the short timescale businesses have had to prepare not just in the context of the multiple changes made to guidance and the late laying before Parliament of the associated legislation with implementation expected in a matter of days and weeks thereafter in some cases but also given the late conclusion of the UK’s negotiations with the EU on 24 December 2020.

For example, guidance on the rules of origin was first published on GOV.UK on 1 December 2020, details of the UK Trader Scheme were first published on 15 December 2020 whilst the guidance on rules of origin for goods moving between the UK and EU were not published until 29 December 2020. Furthermore, the guidance for sending parcels between GB and NI was published on 31 December 2020.

The COVID-19 pandemic continues to put immense pressure on businesses in meeting their regulatory and reporting obligations due to workplace health and safety responsibilities, the challenges of social distancing and staff resourcing constraints. As a result, the regulatory workload of businesses is behind normal schedules.

The changes which businesses are dealing with as a result of the UK’s departure from the EU, coupled with these ongoing pressures due to the pandemic and the national lockdown from the beginning of January in all regions of the UK means that the normal lead time to fully implement the changes is simply not available.

The implementation of the Protocol on Ireland/Northern Ireland continues to be the subject of ongoing work through the Joint Committee and HMRC is therefore continually updating guidance in key VAT areas. As the guidance develops, our recent discussions with your HMRC colleagues have focused on the need for guidance to contain practical examples and case studies to help businesses apply the rules correctly. HMRC’s approach to compliance is a critical element in ensuring businesses are not unfairly penalised as a result of these combined factors.

A practical example of the complexity of the new VAT rules

NI businesses with a VAT quarter end period of November 2020–January 2021 who are due to submit their VAT returns by 7 March 2021. These returns will be particularly complex with NI businesses and their advisors facing the preparation of a VAT return covering three different sets of rules as follows:

• Transactions in the period November–December 2020 falling under the old rules.
• Transactions in goods for the month of January 2021 that remain within the EU rules for goods, but which also need to reflect the changes to accounting for VAT in NI; and
• Transactions in services for the month of January 2021 under the new post-EU rules.

Businesses need adequate time to fully assess the impact of these changes on their specific circumstances, to amend systems and processes where required and to ensure their staff are adequately trained. Mistakes can and will happen as changes, new rules and processes bed down from 1 January 2021.

Given that many of the changes are in respect of how movements of goods are recorded, processed and reported, transactions will often have no net overall loss to the Exchequer. In many cases this means the risk of loss to the Exchequer is therefore minor. This should be helpful as the basis for any potential penalty discussions businesses may need to have in the coming months with HMRC.

“Soft-landing” approach

In these uncertain times, businesses need certainty of HMRC’s approach to compliance. We are therefore asking HMRC to consider automatic suspension of penalties for at least a six-month period. This would mean businesses (and their agents) would not incur the cost of appealing against a penalty in that time period. Handling such appeals adds to the workload and costs for businesses and HMRC alike. HMRC could, of course, seek to act if there is any evidence of deliberate behaviour.

A minimum six-month long grace period for suspension of penalties would match the six-month long deferral period already available for imports entering GB (excluding NI). Thereafter HMRC could implement a further 12 month long soft-landing period using the framework for “reasonable excuse”, albeit on a case-by-case basis. Reasonable excuse for these purposes should fall under an expanded umbrella definition similar to the one currently available to taxpayers by virtue of COVID-19.

Timely communication

HMRC’s approach to how compliance with the new rules will work, particularly in the context of NI businesses who are also grappling with the implications of the Protocol, should be published and publicised as soon as possible.

Early publication and communication will also assist with any uncertainty businesses in the second-hand car dealer industry in particular are currently experiencing as the UK Government awaits the decision of the European Commission to grant or deny a derogation to allow the second-hand goods scheme to continue to be available on cars imported into NI from GB.

As a membership body with over 4,500 members in NI, two thirds of our NI members are working in the businesses which have been preparing for the end of the EU transition period and they continue to endeavour to ensure businesses are able to comply fully in the future with these new rules and changes. Circa 1,700 of our members also work in GB.

This work is vital work and will continue over the course of the next year or more, but it needs the support of a clear HMRC compliance policy with defined parameters which will allow businesses to continue to trade without fear of unfair application of penalties. As an Institute, we are offering both to work with HMRC to define what this soft-landing should look like and to develop any accompanying guidance and to also publicise this to our members and businesses alike so that they are fully aware of what this means for them.