Spring Budget 2023: VAT, indirect and environmental taxes

The Chancellor's announcements on VAT and other indirect taxes are considered in detail by our tax experts in this section.

Budget Main VAT 1920X1080
Sunil Parmar, Jayne Harrold
Published: 15 Mar 2023 Updated: 21 Mar 2023

Key highlights

  • Consultation on VAT relief for energy saving materials

  • Climate Change Agreement scheme extended by two years

  • Penalty reforms for VAT

Detailed analysis

Technical changes to VAT penalties and interest

Amendments to the legislation governing late payment interest, late payment penalties and repayment interest.

Summary

The changes to VAT late payment interest, penalties and repayment interest, which were effective from 1 January 2023, will be subject to some minor technical amendments.

For assessments made to recover payments, or for repayments made to taxpayers that were originally too high, late payment interest will now be charged from the date that HMRC made the original payment, not 30 days after the date of assessment. For taxpayers using the annual accounting scheme, late payment interest and late payment penalties will not be charged on instalments that are paid late. Late payment interest and penalties will still apply to balancing payments that are not made on time.

A repayment interest provision which is not yet in effect, will also be removed as the Government has said it is no longer needed.

Our comment

The changes represent small refinements to the new penalty regime introduced from the beginning of this year.

When will it apply?

For late payment interest – from 15 March 2023.
For late payment penalties – from 1 January 2023.
For repayment interest – from the date of Royal Assent of Spring Finance Bill 2023.

Drink deposit return schemes

New legislation will be introduced governing the VAT treatment of deposits under drink deposit return schemes.

Summary

The new rules aim to avoid complexity for businesses that operate drink deposit return schemes (DRS).
Currently VAT is due on the price payable for goods, including deposits, throughout the supply chain. Where a deposit is refunded to a customer, the VAT is adjusted to reflect the reduction in consideration.
The new legislation will remove VAT from all stages of the supply chain on deposits made under DRS, with the exception of the manufacturer or importer. They will have to account for VAT on the value of the deposits on DRS containers that have not been returned for a deposit refund in an accounting period.

Our comment

The simplification measure will be welcomed by businesses involved in DRS. It removes the need to make VAT adjustments on returned items for all businesses in the supply chain, apart from manufacturers or importers who first sell the products in the UK.

When will it apply?

From 1 August 2023.

Reviews into fund management and the VAT treatment of financial services

The Government is considering reforms to simplify the VAT treatment of supplies within the financial services sector.

Summary

The Government announced it is considering the responses to a recent consultation of the proposed reform of the VAT rules on fund management services and will publish its response in the coming months.

The Government also announced it will continue working with industry stakeholders to consider possible reforms to simplify the VAT treatment of financial services in general. The aim of this measure is to reduce inconsistencies and provide affected businesses with greater clarity and certainty.

The Government will publish its response to the review on fund management services soon, and will keep the treatment of financial services under review.

Our comment

The VAT treatment of financial services is one of the most complicated areas of VAT, so any measures to simplify the VAT treatment are expected to be generally welcomed by the financial services sector.

When will it apply?

Currently unknown.

VAT relief for the installation of energy saving materials

The Government has announced a call for evidence on options to reform VAT relief for the installation of energy-saving materials

Summary

The call for evidence will consider an extension of the VAT reliefs for energy-saving materials, to include where they are installed in buildings used for a relevant charitable purpose. Since 2013, the relief has only applied to installations of qualifying materials in residential property. The review will also consider including within the reliefs additional technologies such as battery storage.

Our comment

Any extension to the VAT relief and inclusion of new technologies will be welcomed by homeowners and charities. It is hoped that the review will be ambitious and result in a much broader relief that will help drive energy efficiency and reduce carbon emissions.

When will it apply?

The call for evidence closes on 31 May 2023.

Carbon Capture, Usage and Storage

The tax consequences of payments into decommissioning funds made by oil and gas companies to repurpose assets for use in Carbon Capture, Usage and Storage (CCUS) will be legislated for at a future date. This will follow Royal Assent of the Energy Bill

Summary

Some oil and gas assets can be repurposed for use in CCUS projects more efficiently than developing new CCUS projects. Oil and gas companies make payments into decommissioning funds for assets which are within the oil and gas corporate tax ring-fence.

The Government will consult on the tax consequences of payments into decommissioning funds where they relate to the repurposing of ring-fence assets for use in CCUS.

Any changes will take effect in the future, after Royal Assent of the Energy Bill, which is currently at the report stage in the House of Lords.

Our comment

The Budget today was highly focused on green industries and the transition to Net Zero to support growth and energy security.

This measure is coupled with the announcement of £20 billion funding for CCUS projects, with the Government aiming to support 50,000 jobs and capturing 20-30 million tonnes of CO2 per year by 2030.

When will it apply?

Future date, to be determined.

Changes to aggregates levy

The Government will freeze the aggregates levy rate of £2 per tonne for 2023/2024, and then increase the rate by RPI to £2.03 for 2024-2025.

Summary

Aggregates levy is paid on the extraction or importation and subsequent use of rock, sand or gravel. The rate has been frozen at £2.00 per tonne since 1 April 2009 but will rise by RPI to £2.03 per tonne from 1 April 2024.

Our comment

Potential increases to aggregates levy have been under discussion for an extended period. The proposed increase of £0.03 per tonne represents a very small increase which is unlikely to have a significant effect on the industry.

When will it apply?

From 1 April 2024.

Landfill tax rates

Landfill tax rate increases in line with RPI have been published.

Landfill tax rates for England and Northern Ireland are increasing in line with RPI for 2023 and 2024 as follows

  Rate from 1 April 2023 Rate from 1 April 2024
Standard rate £102.10 £103.70
Lower rate £3.25 £3.30

Our comment

Landfill tax normally rises in line with RPI on an annual basis. These increases are in line with expectation.

A summary of responses to the landfill tax call for evidence was also published today. The call for evidence was focused on potential reform of the lower rate of landfill tax, exemptions, and discounts, with a view to encourage material to be diverted from landfill. There are no clear recommendations in the response, but it is clear that the Government considers reform necessary, and it will be consulting on the potential changes to be made.

When will it apply?

From 1 April 2023.

Pharmacists' services and prescriptions for medicine

An extension to the VAT exemption for services by staff who are directly supervised by registered pharmacists. The zero rating for prescriptions for medicines dispensed on prescription is also being extended.

Summary

Two changes to legislation for supplies by pharmacies were announced by the Chancellor.

The first is an extension to the exemption for healthcare services carried out by staff directly supervised by medically qualified professionals. This will now include pharmacists.

The second change is an extension to the zero rating on prescriptions for medicines supplied through patient group directions.

Our comment

These measures should be good news for the general public, as there should be a cost saving on the related pharmacy services.

When will it apply?

1 May 2023 for the pharmacist exemption, and autumn 2023 for zero rating on prescriptions supplied through patient group directions.

DIY Housebuilders Scheme

Changes to the DIY housebuilders scheme will include digitisation of the repayment claim applications, and an extension to the deadline for submitting the claims.

Summary

Two changes were announced in respect of the DIY housebuilders scheme.

The first change will be to digitise the scheme. Currently taxpayers must fill in and submit a manual form, which is posted to HMRC. There will also be an extension to the time limit for making claims from 3 months to 6 months.

Our comment

It has been evident for many years that the DIY VAT refund scheme needed updating. These improvements will not only simplify the process for taxpayers building or converting a building into their own home, it will also ease the burden around making claims.

When will it apply?

Currently unknown.

Increase to plastic packaging tax rate

Plastic packaging tax is to increase in line with CPI to £210.82 per tonne from 1 April 2023.

Summary

Plastic packaging tax was introduced on 1 April 2022, and is a tax on plastic packaging that has less than 30% recycled content, either manufactured in the UK or imported into the UK. This includes packaging on imported goods.

The rate of tax is currently £200 per tonne. The rate will increase in line with CPI to £210.82 from 1 April 2023.

Our comment

The purpose of plastic packaging tax is to incentivise the reduction of plastic packaging in the supply chain and increased use of recycled plastic.

For many businesses, the rate of plastic packaging tax is immaterial when compared to the cost and complexity of administering the tax. A rate increase in line with CPI will do little to stimulate further behaviour change in the supply chain.

When the tax was being proposed it was suggested that an escalator may be introduced to set a fixed trajectory for increases to both the rate of plastic packaging tax and the threshold for recycled content.

For many businesses this long-term certainty with respect to rate and recycled content is needed to help stimulate further investment in recycling infrastructure and packaging innovation.

When will it apply?

From 1 April 2023.

Increase in late payment penalties for plastic packaging tax

Late payment penalties for plastic packaging tax are being amended so that assessments and late payments of returns are treated in the same way. The penalties for late payments of returns will be 5% for periods beginning on or after 1 April 2023.

Summary

Under the current rules on late payments of returns, the first late payment starts a 12-month penalty period. Subsequent late payments within the penalty period incur penalties of 2% for the first default, 3% for the second default and 4% for the third and subsequent defaults.

The Budget announcement increases the penalties, such that late payments of returns for return periods beginning on or after 1 April 2023 will always incur a 5% penalty.

Our comment

An increase in the penalty for late payment of plastic packaging tax will have a significant impact on many businesses that are still trying to overcome the administrative complexities of preparing and filing plastic packaging tax returns.

HMRC’s tax receipt statistics show that there are significant late payments being made for plastic packaging tax. In theory, HMRC should only receive plastic packaging tax payments in July, October, January and April. The tax receipt statistics show significant receipts for every month from July 2022 onwards.

When will it apply?

From 1 April 2023.

Climate Change Levy rate increase

The main rates of Climate Change Levy for gas and solid fuels are to be increased. The gas rate will also be aligned with the electricity rate, and the solid fuels rate will increase proportionally to the gas rate.

Summary

The Climate Change Levy main rates announced in the Budget were:

Taxable commodity 1 April 2023 1 April 2024
Electricity (£/kilowatt hour) 0.00775 0.00775
Gas supplied by a gas utility (£/kilowatt hour) 0.00672 0.00775
Petroleum gas, or other gaseous hydrocarbon (£/kg) 0.02175 0.02175
Any other taxable commodity (£/kg) 0.05258 0.06064

Our comment

This change in rates is consistent with the Government’s objective to close the gap between the tax rates for gas and electricity to better reflect the carbon emissions associated with their use.

When will it apply?

From 1 April 2023.

Climate Change Agreements extended for energy intensive businesses

Climate Change Agreements (CCAs) have been extended by two years to 31 March 2027 and reopened to new entrants. This will mean businesses in energy-intensive industries with a CCA will pay reduced climate change levy rates for two more years, provided the sector as a whole meets agreed energy efficiency targets.

Summary

CCAs provide energy-intensive businesses with discounts on the climate change levy charged on their energy bills in return for meeting energy efficiency targets. The reduced amounts relative to the main rate are as follows:

Taxable commodity 1 April 2023 1 April 2024
Electricity 92% 92%
Gas 88% 89%
Any petroleum gas 77% 77%
Any other taxable commodity 88% 89%

 

CCAs have been closed to new entrants and were due to end on 31 March 2025. In the Budget the Government has reopened the scheme to new entrants and extended it for two years to 31 March 2027.

A consultation on a replacement scheme has also been launched today, closing on 10 May 2023.

Our comment

CCAs are a key element of the Government’s support for energy-intensive businesses. The energy efficiency requirements help reduce emissions and drive progress towards net zero.

The CCAs are available for sectors with high energy use which are subject to international competition and provide valuable cost savings to eligible businesses.

The consultation document outlines some reforms that could be taken forward as part of a future scheme but notes that no decisions have been made on whether a future scheme will be pursued.

Failure to address the risk of international competition could result in energy-intensive businesses becoming uncompetitive and/or relocating to other territories with lower emissions regulation, leading to higher carbon emissions, a phenomenon referred to as carbon leakage.

Affected businesses will be keen to understand the future position beyond 31 March 2027. If CCAs are not continued, alternative measures, such as a carbon border adjustment mechanism, which address the risk of cheaper imports from territories with lower emissions regulation (leading to higher emissions) will be needed.

Aggregates levy reform delayed

Aggregates levy is being reformed to ensure that locally sourced aggregate used in construction is taxed, unless it is used in quarrying, agriculture or forestry.

A complex series of exemptions are also being removed and replaced with a new simpler exemption for aggregate which is unavoidably extracted as a by-product of construction.

The proposed reforms are being delayed to 1 October 2023 to give affected businesses more time to register and prepare.

Summary

The Government published draft legislation in July 2022 connected with proposed reforms to aggregates levy.
Under current rules, material which is used within a site and not mixed with other materials is exempt from aggregates levy.

To address concerns raised by the industry about non-taxation of construction material taken from ‘borrow pits’, this exemption is being withdrawn except for aggregate reused on the same site it was won from for the purposes of quarrying, agriculture or forestry.

The series of complicated exemptions for aggregate, which is extracted as a result of various construction activities, is also being reformed to simplify the tax. They are replaced by a single new exemption for unavoidable aggregate resulting from the construction or improvement of any structure, or of any infrastructure relating to transportation or utilities.

Our comment

The changes to the taxation of locally sourced material taken from borrow pits represents a major change for the industry. Borrow pits tend to be used in large infrastructure projects such as road, rail, wind farm, transmission line, and pipeline projects. Developers will now need to identify locally sourced material and agree a methodology with HMRC for assessing the amount of material used.

Simplification of the exemptions for construction activities will hopefully reduce the administrative burden for affected industries, particularly the water industry, and reduce the number of disputes with HMRC.

When will it apply?

From 1 October 2023.

Other VAT, indirect and environmental taxes measures

The following is a summary of previously announced VAT, indirect and environmental taxes measures that have been included in the documentation for this Budget.

  • The Budget confirmed that the electricity generator levy announced at the Autumn Statement will be legislated for in the Spring Finance Bill 2023. The electricity generator levy is a 45% tax on the exceptional generation receipts of low-carbon electricity generation for companies or groups with more than 50 GWh per year of low-carbon electricity, which is exported to the transmission network or local distribution network.  The levy applies from 1 January 2023 to generation receipts in excess of £75 per MWh after deduction of certain allowable costs, and subject to a £10 million annual allowance
  • Changes to the energy profits levy are to be legislated for in the Spring Finance Act 2023. The changes enacted increased the rate of energy profits levy to 35% and reduced the investment allowance to 29%. In the Budget it was confirmed that an investment allowance of 80% will be legislated for in the Spring Finance Bill 2023 for investment in upstream decarbonisation with effect from 1 January 2023

For more Spring Budget 2023 analysis, visit our hub.