As a professional accountancy body with more than 2,500 members in public practice serving more than 750,000 businesses across the SME sector, The Institute of Financial Accountants had a uniquely frontline view of the industry in 2020. As we tentatively look forward to a less turbulent 2021, with hope rising in the form of mass vaccination, it is difficult not to reflect on the Covid-era and the impact it has had on our sector.
While other sectors took advantage of furlough, and many businesses closed temporarily, accountants were arguably the key workers of the business service sector, continuing business as normal, at the same time handling a significant level of turbulence and a sleugh of new responsibilities. First, there were the government support schemes to understand and then apply for clients, which presented significantly increased workloads as businesses sought to stay afloat. Next, there was adapting to the pressure of getting it wrong, as HMRC announced fraud investigations into those businesses suspected of exploiting the support schemes for personal gain. Then there was the additional client support needed, delivering on the role of critical friend and trusted adviser, as businesses and clients sought to streamline, diversify, pivot and even entirely change their business model in a locked down world. Accountants were, and continue to be, at the frontline for all these changes, at the same time maintaining their normal routines of tax returns, payrolls, annual accounting and much more besides. To say our sector stepped up is an understatement, and I for one am extremely proud.
With these triumphs came a lot of personal pressures and sacrifices as many in our sector struggled with astronomical workloads and highly concentrated deadlines. Not everyone escaped unscathed and there continues to be a significant impact on the health and wellbeing of the people in our sector; something which I hope will improve over the coming months. Despite this, my overarching experience of the pandemic so far is that we are a sector that has shown overwhelming resilience, grit and determination, traits of which we should be very proud.
I believe Covid-19 provided a springboard that has and will continue to shape our sector sometimes for the better, despite the obvious challenges. We have seen significantly accelerated adoption of digital software solutions, both by accountants and their clients, to improve transparency and efficiency. Aspects like training and development are also being delivered much more effectively online, which can only provide gains for the sector. I believe that these advances will become further embedded over the coming year and will support the sector to become more advantageous to our clients, working with better quality, real-time information to analyse, review and advise clients more effectively, and to move into a new era of accountancy, where we are chosen first and foremost as critical friends to the businesses that work with us.
The UK has already taken significant strides to roll out vaccinations, surpassing 13 million adults to receive their first dose. Inoculation continues at a rate of around 400,000 per day at the time of writing, with promise that every adult will have been offered the vaccine by Autumn 2021. This gives significant hope of an end to the pressing Covid challenges, and hopefully a reduction in pressure for our sector, which I am sure many are looking forward to.
So, assuming there are no significant shifts in how the virus behaves, nor the expectations of the government and businesses, our attention must instead turn to the deadlines of the future, and the legislative and regulatory changes we will need to get to grips with next.
What’s coming up in 2021?
If the Government doesn’t opt to delay the upcoming deadlines, or change them altogether now that we have left the EU, this year, accountants will need to deliver on:
- VAT reverse charges: as part of our departure from the EU, businesses will need to use VAT reverse charges to calculate equivalent VAT on services bought from businesses outside the UK. This applies from 1 March 2021 and is particularly pertinent to the construction sector. If you purchase a service from outside of the UK, that can also be bought within the UK, then the VAT reverse charge applies. For example, if a business uses a native translator from France to translate materials, an equivalent translator in the UK would be subject to VAT at 20% and therefore, the reverse VAT calculation applies at 20%. This calculation does not, however, impact how much is paid to, or reclaimed from, HMRC in the VAT quarter, as the reverse VAT charge should be added to both the VAT that is due to be paid to HMRC, but also the VAT that is reclaimed from them, to balance.
- The Sanctions and Anti-Money Laundering Act 2018 (the Sanctions Act): another adaptation because of Brexit is the introduction of the Sanctions Act. Applicable from 1 January 2021, this is the new legal basis for the UK to impose, update and lift sanctions, and accountants must ensure any activity with a sanctioned country or entity remains fully compliant. There are two lists of sanctions which now apply in the UK: the UK Sanctions List, which covers all sanctions made under the Sanctions and Anti-Money Laundering Act 2018, or The Office of Financial Sanctions Implementation (OFSI) Consolidated List of Financial Sanctions Targets, which covers all financial sanctions designations. Together, these create a list of persons, entities or ships that companies are restricted from dealing with. Separately, there is still an EU-specific consolidated sanctions list maintained by the European Commission that should also be used for sanctions screening alongside the UK lists. This of course only applies to businesses who are continuing to work with EU companies, or who have EU operations as part of their organisation.
- Other post-Brexit legislative or reporting changes: ahead of our exit from the EU on 1 January 2020, the government published a letter to accountants outlining the compliance and reporting changes that will be implemented post-Brexit. There are also a series of other changes which come into force from 1 January 2021, and of course there are many changes under discussion or pending, which may come into force later in the year. The main ones thus far are:
- VAT and Duty Customs Reporting: for any business that move goods into or out of the EU, customs changes apply, including import VAT (from January 2021), use of Economic Operators Registration and Identification (EORI) numbers (from January 2021), and customs declaration and tariff payments (from July 2021).
- Changes to online selling: for businesses that sell via online marketplaces or ecommerce websites, to individuals or businesses outside the UK, changes will apply. These changes depend on whether the goods are shipped from the UK, in which case they will be treated as an export and will be zero-rated, or if they will ship from within the EU, then businesses will need to register for VAT in that country to account for VAT. There are also changes to VAT for consignments shipped from the EU into the UK to fulfil an online order: the low value consignment relief for imported packages with a value less than £15 is being abolished. As such, UK VAT will be due on all consignments regardless of value.
- Spring Budget: although we cannot accurately predict what is changing, it is likely that the spring budget will bring significant tax changes into force. The Government has had significant expenditure in recent months, so it is likely they will seek to recoup some of these outgoings with reformed taxation, and it is highly likely that these changes will be announced on 3 March 2021 and introduced from 6 April 2021. What we already know is that from the new tax year (6 April 2021), income tax allowances and thresholds, and national insurance limits will increase in line with the September CPI figure of 0.5%, which is the minimum required by legislation. Therefore, the personal allowance for 2021/22 should be at least £12,570 (up from £12,500 in 2020/21) and the basic rate limit for 2021/22 should be £37,700 (up from £37,500 in 2020/21). Meanwhile, the National Insurance limits and thresholds for 2021/22 will also follow the September CPI figure increases.
- Making Tax Digital Phase Two (MTD2): postponed from April 2020 until April 2021, MTD2 makes three additional extensions to the original Making Tax Digital programme. It requires businesses / accountants to:
- specifically use suitable software which can deliver live data to HMRC. Previously, HMRC accepted ‘bridging’ software to allow digital reporting by API, but now expects all businesses to be using appropriate software to communicate directly.
- have end-to-end integration. Whereas in the first phase, HMRC accepted an API link from the endpoint software and permitted data to be manually imported, they now require that ANY system you use, integrates end-to-end, so that data is or can be transferred between systems automatically, with no human interaction. This is designed to achieve additional transparency and reduce the opportunity for fraudulent filings. This may require businesses to change one or more business systems if they cannot support this transfer of data.
- move from weekly or monthly data input to date of transaction input. This means there is a specific requirement to record the actual date and value of purchases, sales, and their rate of VAT, rather than grouping them together. This will change processes for businesses which group transactions against a bank statement or sales statement for example, rather than inputting them individually.
It is possible that MTD2 will be further delayed, or that the ‘soft-landing’ period – during which the new regulations have not been enforced by HMRC, and no businesses have been fined – may be extended to account for the commercial challenges of Covid-19.
- IR35 tax changes: despite the recent challenges, there is no indication from the Government that we should expect a delay in the IR35 tax changes. Everyone is and should continue to work towards the 6 April 2021 date to comply with the updated rules. Under current IR35 guidelines, if a person would normally be employed directly by a business, but instead provides services as a contractor to that business through an intermediary, then that person is responsible for paying taxes. What’s more, if a private sector business engages a contractor through an intermediary, liability to decide whether IR35 applies and to pay any employment taxes rests with that intermediary. Under the new IR35 legislation, which was included in the Finance Act 2020, responsibility will shift to the company engaging the contractor. The engaging business will now be liable for determining whether the IR35 rules apply and will also be required to operate PAYE and pay employers’ National Insurance contributions. At present, these changes will not apply to small businesses.
In addition to all these changes, the coronavirus loan schemes will close to new applications at the end of March 2021, National Minimum Wage and National Living Wage rates will increase from 1 April 2021, and currently, the Job Retention Scheme will close at the end of April 2021 unless the government chooses to extend it. Many businesses will also likely need additional support to tackle the aftermath of Brexit, with advice on handling travel and movement restrictions and the ensuing impact on the business. Generally, I feel there is a very positive outlook for 2021, and I am hopeful for the future of the sector and the wider business community.
Commentary from John Edwards, CEO at the Institute of Financial Accountants
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