Spring Budget 2022 Update – Employment Taxes and VAT
The Chancellor, Rishi Sunak, delivered his 2022 Spring Statement speech on 23 March. It included some important Employment Taxes updates relevant to public bodies. Many of the measures ensure continued efforts to combat the cost of living while setting out the government’s plans for tax reforms, rates and thresholds, as well as investments in compliance operations.
For VAT, perhaps the biggest surprise in the Statement was what was missing. For example, many commentators expected a postponement of the end of the temporarily reduced rate for hospitality, holiday accommodation, and attractions. As it is, these supplies will again be standard rated from 1 April 2022.
Also missing was a much-hoped-for zero-rating for domestic fuel and power supplies.
A summary of the key issues follows.
Rates and thresholds
National Living Wage (NLW)
The government confirmed its plans to increase the National Living Wage (NLW) for workers aged 23 and over by 6.6% to £9.50 an hour from April 2022.
National Insurance Contributions (NICs) thresholds
The Spring Statement announces an increase in the annual National Insurance Primary Threshold and the Lower Profits Limit from £9,880 to £12,570 from 6 July 2022 to align with the income tax personal allowance.
This is a tax cut of over £6 billion and worth over £330 for a typical employee in the year from July 2022. Around 70% of NIC payers will pay less NICs, even accounting for the introduction of the Health and Social Care Levy.
It aligns the starting thresholds for income tax and NICs, making the taxation of income fairer, and these thresholds will remain aligned. It is useful to note that the personal allowance will be held at its current level until 2026.
In April 2020, the government increased the Employment Allowance from £3,000 to £4,000. This Spring Statement announces a further increase from April 2022, meaning eligible employers will be able to reduce their employer NIC bills by up to £5,000 per year – this is a tax cut worth up to £1,000 per employer. As a result, businesses will be able to employ four full-time employees on the National Living Wage (NLW) without paying employer NICs.
Other measures and announcements
Covid-19 Test Exemption
There will be a one-year extension (2022/2023 tax year) to the exemption for employer-provided and employer reimbursed coronavirus antigen tests.
Apprenticeships and Employee Training
The government will consider whether further intervention is needed to encourage employers to offer the high-quality employee training the UK needs. This will include examining whether the current tax system – including the operation of the Apprenticeship Levy – is doing enough to incentivise businesses to invest in the right kinds of training.
The Spring Statement announces a temporary 12 month cut introduced to duty on petrol and diesel of 5p per litre, representing a saving worth around £100 for the average car driver, £200 for the average van driver, and £1,500 for the average haulier, when compared with uprating fuel duty in 2022-23.
The government is announcing that it will double the NHS efficiency target from 1.1% to 2.2% a year, freeing up £4.75 billion to fund NHS priority areas over the next three years and ensuring that the extra funding raised by the Health and Social Care Levy is well spent.
The Chancellor announced the introduction from 1 April 2022 a time-limited zero-rate of VAT for installing certain Energy-Saving Materials in residential accommodation. The change includes a broader scope of eligible zero-rating materials previously restricted due to EU legislation.
Energy-saving materials – current rules
From 1 October 2019, installing energy-saving materials in residential accommodation would only benefit from the reduced rate where one of the social policy conditions was satisfied, or a 60% threshold was not exceeded.
Social policy conditions
The installation of energy-saving materials in residential accommodation is currently a reduced rate supply when any one of the social policy conditions below is satisfied.
• The supply of the installation was to a ‘qualifying person’ in the qualifying person’s sole or main residence. A qualifying person is defined in legislation as a person who is aged 60 or over or was in receipt of one of certain benefits
• The supply of the installation was to a relevant housing association
• The supply is to a building or part of a building used solely for a ‘relevant residential purpose’ as defined in legislation. This includes children’s homes, care homes, and accommodation for the armed forces
• Where the 60% threshold is exceeded, the value of the supply would need to be apportioned between materials and labour. The materials element is a standard rated supply, with the labour element receiving the benefit from the reduced rate
Where the social policy conditions are not met, the installation can be reduced rate if the cost of the materials is 40% or less of the overall supply.
New rules from 1 April 2022
The Chancellor announced that the zero-rate will be available for five years and will revert to the 5% reduced VAT rate.
The measure permanently removes the social policy conditions and the 60% test.
Implications for section 33 bodies
The change will have a negligible effect on section 33 bodies such as local authorities, National Park authorities, police forces, and fire and rescue services. In most cases, section 33 bodies would have been able to reclaim the VAT charged as it would relate to their non-business activities, such as a local authority’s housing provision. Other section 33 bodies do not normally provide housing.
However, local authorities are increasingly involved in the private rental sector, where they will be making VAT-exempt supplies. Here, the change will be beneficial, taking some strain from local authorities’ partial exemption calculations. In the rare cases where local authorities are partially exempt, the change will create actual savings.
The change will have the most beneficial effect in the local government sector on local authority housing companies, who often are not VAT-registered, or, when they are, make predominantly VAT-exempt supplies.
There is still uncertainty about single projects with zero and standard rated elements. Apportionment is not available under the current rules, where the dominant supply drives the VAT rate. We will update clients when the position is clear.
Where professional fees are also incurred, there might also be an opportunity to run such work through a single contract, possibly using a subsidiary, which would allow zero-rating on the associated professional fees. A similar principle to design and build contracts/entities.
The Domestic Reverse Charge for Construction Services (‘the DRC’)
The DRC can apply currently to installing energy-saving materials where the customer is not an end-user or intermediary. The change of VAT treatment to zero-rated means their installation will no longer be within the DRC.
From 6 pm on 23 March 2022, fuel duty was cut on petrol and diesel by 5 pence per litre for 12 months.
Implications for section 33 bodies
Public bodies with vehicle fleets will benefit from the reduction in fuel duty. As the reduction is for 12 months only, consideration should be given next year for restocking in-house fuel bunkers before 23 March 2023.
Tackling Fraud and Supporting Compliance
Investment in HMRC
The government has pledged £161 million investment over the next five years to increase HMRC’s compliance and debt management capacity.
This investment is forecast to bring in more than £3 billion of additional tax revenues over the next five years, by:
• funding additional HMRC staff to provide greater support to taxpayers
• seeking to pay off accrued tax debts
• to tackle the most complex tax risks, ensuring large and mid-sized businesses pay the tax they owe
Investment in DWP
As announced in December 2021, the government is investing an additional £510 million to increase DWP’s capacity and capability to prevent and detect fraud and error and collect more debt. This investment is forecast to deliver savings of £3.15 billion by 2026-27.
Public Sector Fraud Authority
The government is putting counter-fraud at the heart of decision-making through a new Public Sector Fraud Authority to tackle fraud. An additional £48.8 million funding will be provided over three years to support the creation of a new Public Sector Fraud Authority and enhance counter-fraud work across the British Business Bank and the National Intelligence Service.
This new Authority will target risk areas that have been identified within the public sector, such as procurement fraud, grant fraud, recruitment, and payroll fraud. Patient charges fraud in the NHS is another area that will be reviewed.
If you have any questions about anything in this alert, please contact:
VAT and SDLT