New VAT considerations arising from the Covid-19 pandemic

Lyndon Firth outlines some of the things to consider in both the short and longer terms as the pandemic impacts on organisations' VAT situation.

Date: 2nd Jul 2020

Author: Lyndon Firth, BDO

For many organisations within the sports sector, VAT is one of the largest tax flows. And for those that provide exempt sporting services, irrecoverable VAT can be a significant cost.

As a result, it’s important to consider any ways that VAT incurred on costs can be mitigated and the cash flow of VAT payments managed effectively. This could be achieved through focusing on the VAT liability of supplies, construction planning or implementing solutions to maximise VAT recovery (particularly through partial exemption). Undertaking cost reduction reviews may also help sports organisations to obtain retrospective VAT reclaims and secure prospective savings.

Covid-19 impacts

Following the Covid-19 outbreak, the Government introduced a number of helpful measures, such as the ability to defer paying VAT return liabilities falling due between 20 March 2020 and 30 June 2020. However, it is important to consider the long-term impact of the pandemic on the sports sector. Organisations will need to consider various factors (all of which carry tax consequences) including:

  • use of venues – Covid-19 has prevented the use of sporting venues (in particular, arenas and stadiums), hitting income hard and bringing potential tax consequences from any change in use.
  • operating models – organisations are being forced to review their operating models, particularly those dependent upon the physical use of sports facilities and spectator events, and to consider any investment required e.g. online platforms and facilities compliant with social distancing requirements.
  • funding – Sport England has made £195m of funding available to help the sport and physical activity sector during Covid-19. How can this funding be used to deliver long-lasting benefits for recipients and the sector overall?

Temporary reduction in the rate of VAT?

Internationally, governments are taking action to boost their economies through measures that include reducing VAT rates. For example, Germany has temporarily cut its regular and reduced rates of VAT, while Belgium has temporarily cut the VAT rates applying to certain restaurant and catering services.  

The UK Government has come under pressure to consider a temporary reduction in the standard rate of VAT (currently 20%). For example, such a move is supported by Boris Johnson’s former economic adviser, Gerard Lyons, on the grounds that it would boost growth and is affordable because the Government can keep borrowing at record-low interest rates.

A temporary reduction in the UK standard rate of VAT would benefit the sporting sector, given the amount of VAT-bearing costs the sector incurs and the potential to increase user demand. There is a precedent for such action. The VAT rate was previously cut from 17.5% to 15% between 1 December 2008 and 31 December 2009 in a bid to help the UK economy recover from the late-2000s recession.

If there is a cut to the rate, and speculation is that this would be to 17% or perhaps even 15%, it is likely to be announced in the Chancellor’s “fiscal event” on 8 July 2020. Looking back at the 2008 reduction, this was done at one week’s notice. Organisations may therefore need to make rapid systems changes as part of implementing any new rate announced this summer.  

Managing VAT to protect cash flow

Please see another of our blogs outlining the Covid-19 measures introduced by the Government applicable to organisations within the sports sector and an overview of VAT cash flow ideas and VAT mitigation opportunities.

Lyndon Firth is a Partner at BDO. If you would like to speak to a member of the BDO team about the help available or review other COVID-19 guidance please visit our dedicated microsite here.