VAT News

If you would like to discuss any of the items featured in this edition of VAT News please contact Scott Craig, VAT Partner. Click on the links below for more:

VAT News August 2008

Relocation of VAT Central Unit- the end of an era

From the day VAT was introduced in the UK the VAT Central Unit has been located in Southend.

This is scheduled to change during 2008 as HMRC is establishing a new VAT Central Unit in Shipley. It is hoped that this change will lead to more efficient processing and a quicker resolution of problems with returns and payments.

The changes will be made in two phases. Phase 1 will affect VAT returns and associated cheque payments. Returns for period 06/08 (for accounting periods ending 30th June with a due date on or after 31st July 2008 will be the first to feel the affect of the change.

Business reply envelopes (BREs) bearing the new address will be issued with the relevant returns.

Phase 2 changes are scheduled for the end of December 2008, will cover other VAT accounting documents.

Voluntary Disclosure limits to change

A new threshold for voluntary disclosures was introduced on 1st July 2008.

The new threshold is the higher of �10,000, or 1% of turnover (subject to an upper limit of �50,000). Turnover can be taken from Box 6 on the VAT return (total sales) for a particular VAT quarter.

VAT: Domestic Property disposals in an uncertain market

A worrying feature of late in the domestic property is that new dwellings are are not being sold.

From a VAT point of view, this can result in VAT costs for house-builders or speculative developers. To be entitled to recover all of the VAT incurred on the cost of such developments the house-builder must dispose of a major interest in each of the new dwellings created. A major interest is either the outright sale or the grant of a lease for more than 20 years (21 years in England & Wales).

Where buyers cannot be found for the new properties, developers are being advised by banks to secure short-term tenancies so they can start to generate income and may payments toward their bank borrowings.

Here there is a risk that the house-builder may have to restrict or pay back some or all of the VAT incurred on the development as the grant of a lease for any period less than 20 years is an exempt supply.

Whilst there is good commercial rationale behind the banks advice, the VAT impact of such a move should be considered and discussed with the bank. Depending on circumstances, the VAT loss can be mitigated but we would strongly advise that this is looked at prior to taking the above course of action.

Rank plc decision - VAT on bingo & gaming machines

An important VAT Tribunal decision could result in significant reclaims of VAT by bingo hall operators.

The Tribunal ruled that the UK VAT law's differing treatment between different types of bingo is contrary to EU law. As such, income from mechanised or interval bingo machines and gaming machines is exempt.

This case provides an opportunity for bingo hall operators to make claims for the repayment of overdeclared VAT and interest to HMRC. Equally if taxpayers have received assessments from HMRC in this area, there may be an opportunity to have these reversed or removed.

If you have any clients whom you believe may benefit from this ruling, pleasecontact Scott Craig, VAT Partner.

VAT News May 2008

Click on the headlines:

Recovery of VAT by Public Bodies

We understand that HMRC has now agreed to a temporary suspension of the VAT partial exemption de-minimis rules that local authorities used to calculate the value of recoverable VAT.

Historically local authorities have been required to restrict the VAT (on expenditure) that is attributable to exempt supplies where it exceeds 5% of the total VAT they incurred. We understand that HMRC has suspended these rules for the 2007/2008 VAT year. This should improve the VAT recovery position for many local authorities and allow them to avoid the time consuming partial exemption calculations.

Although this appears to be a temporary measure we understand that HMRC are reviewing the de-minimis rules that apply to local authorities and may abolish the partial exemption calculation altogether. This could ultimately lead to an increase in the value of recoverable VAT for many local authorities and savings in staff time. It could also ensure that local authorities are not required to opt to tax tenanted properties - good news indeed!!

Eligible Bodies

Certain public bodies have a special VAT status. Such bodies can ultimately recover all of the VAT they incur on statutory non-business activities. We believe that any public body that is not benefiting from this special status should now review its position.

We have identified a number of public bodies that have been unaware of their entitlement to special VAT status and as a result have been able to make retrospective claims for input tax.

We have also established that many public bodies do not have the special VAT status because the organisations VAT status was not considered when it was established. With the support of HMRC it is possible to petition the Government and amend VAT legislation to include certain qualifying bodies not already on the published list.

Scott-Moncrieff�s VAT team has experience of confirming the VAT status of public bodies, submitting claims for under-declared input tax and assisting bodies to obtain special VAT status. If you would like to discuss any of these areas please contact our VAT partner, Scott Craig.

Staff hire concession removed

Historically a VAT concession allowed employment businesses to charge VAT on their profit margin only. This reduced the cost of irrecoverable VAT for a large number of not for profit organisations - especially those in the Health Welfare and Education Sectors who could not recover all of the VAT they incurred. HMRC has announced that this concession will be withdrawn from 1 April 2009. This will have a significant impact on the way employment businesses account for VAT. (It could also have a knock-on effect for businesses hiring staff who may incur additional VAT costs on these services following this change).

For Public Sector bodies that are allowed to recover the VAT they incur on 'contracted-out' services we believe that this change will have little or no impact. However for those that are not classified as 'VAT eligible bodies' the cost of employing temporary staff could increase.

At this stage we would suggest organisations confirm how this change will affect them and where appropriate alternative arrangements could be introduced to reduce the cost of irrecoverable VAT. Our specialised VAT team would be happy to discuss these arrangements with any one that is interested in finding out more.

It�s VAT time of year again

This is the time of year that annual partial exemption, business, non-business calculations and capital goods scheme adjustments are required to be made.

VAT returns allow the provisional recovery of VAT incurred on expenses and where exempt or non-business activities take place an element of input tax is normally blocked from recovery. This provisional recovery must be averaged and confirmed once a year.These annual adjustments are normally made on the first return of each new VAT year being June, July or August.

Whilst the calculations are compulsory many fail to perform them.This results in an exposure to assessment from HMRC and the risk of unbudgeted costs.

This is also an excellent time to consider some basic VAT questions:

Have associated VAT rules changed?
Has VAT been correctly accounted for on all income?
Where VAT has been incurred on expenditure was this correct?
Do existing calculations reflect the activities undertaken?
Could the recovery of VAT be improved?

Changes to funding arrangements and the diversification of activities can often increase the value of recoverable VAT.

Finally don�t forget capital items. If you have purchased, constructed or renovated property in the last 10 years (and incurred costs exceeding �250,000 per project) or have purchased an individual item of computer equipment (valued in excess of �50,000) you should review the VAT recovered on these items end of each VAT year. VAT recovered on property should be reviewed for 10 years, VAT on computer equipment 5 years. An adjustment to the amount of VAT originally recovered will be required where the taxable use or activity changes. This could result in additional VAT claims or repayments to HMRC.

Let them eat cake!

In the recent Marks and Spencer (M&S) VAT case the ECJ accepted that a chocolate teacake was a cake (not a biscuit) and could be zero-rated.

HMRC went onto argue that if it refunded the VAT that had been over declared M&S would be "unjustly enriched� HMRC believed that unjust enrichment applied as M&S would be in a better economic position than if VAT had not been applicable in the first place.

M&S argued that it was HMRC that was being unjustly enriched because no tax should have been collected in the first place. It accepted that 90% of the tax was passed on to its customers. However it did not believe that the UK government should benefit.

The ECJ has ruled, in principle, that the overpaid VAT should be repaid in full, however it has left the final decision to the House of Lords.

If M&S is successful the outcome this case could set an interesting precedent for any business that claims a refund of over-declared output VAT on wrongly classified supplies.

�1 Billion Limitations

The much publicised decision in the Cond� Nast Publications Ltd case has led to HMRC backing down on their position, and allowing claims to be made for under claimed input tax prior to 1 May 1997 and overpaid output tax prior to 4 December 1996. Many believe this could lead to repayment claims totalling �1 billion.

If you have a claim for the aforementioned periods you should be aware that HMRC have announced a deadline of 31 March 2009 � it is unlikely that any claims submitted after this date will be honoured.

It is expected that HMRC will require documentation to support the claims (per the normal VAT rules).

This could pose a problem for some organisations given that the claims will relate to transactions spanning anything from 11 to 35 years ago.

Budget 2008 - VAT News

Looking for a past edition of VAT news? Click here

VAT registration

From 1 April 2008, the taxable turnover threshold for VAT registration will increase from �64,000 to �67,000, while the deregistration threshold will increase from �62,000 to �65,000.

Correction of VAT errors

From 1 July 2008 the limit for disclosing errors to HMRC on VAT return forms has increased from �2,000 to the greater of either �10,000 or 1% of turnover, with an upper limit of �50,000. Similar increases will apply to other indirect taxes.

Staff hire concession removed

HMRC currently allows a concession whereby, in certain circumstances, employment businesses need only charge VAT on their profit margin. The concession will be withdrawn from 1 April 2009. This will have a significant impact on the way employment businesses account for VAT. (It will also have a knock-on effect for businesses hiring staff such as welfare institutions and charitable organisations, who will incur increased VAT on these services following this charge).

Time limit for VAT claims

Following HMRC�s recent defeat in the cases of Fleming and Conde Nast concerning the �3 year cap�, claims for output VAT overpaid before 4 December 1996 and input VAT underclaimed before 1 May 1997 can now be submitted. Claims can be made for VAT periods going back to 1 April 1973. HMRC has announced that all VAT claims for the above periods must be received by 31 March 2009, after which time the entitlement to make a claim will be lost.

Fuel scale charges

From 1 May fuel scale charges for businesses that recover input tax on fuel used for private motoring have been amended to account for changes in fuel prices. For more details click here.

Property: option to tax

A COMPLETE re-write of the option to tax legislation will be introduced from 1 June 2008. A new guidance notice, which will have the force of law, will also be published by HMRC. The new legislation will introduce a number of important changes to the option to tax, including:
- rules concerning the revocation of options;
- options made by VAT groups; and
- a new type of option covering multiple properties.

The changes are intended to simplify the highly complex option to tax rules and to deal with a number of common problem areas. They will be of particular interest to businesses in the property sector, but will potentially have an impact for any business with property interests.

Fund management

Following HMRC�s defeat in the JP Morgan Fleming Claverhouse case last year, the exemption for fund management services is to be extended to include the management of:
- UK listed closed-ended investment entities which invest in securities; and
- non-UK established funds recognised under the Financial Services & Markets Act 2000.

This will extend the exemption to include management of investment trust companies, which was the subject of the JP Morgan case, and venture capital trusts. The new rules will apply to fund management services supplied on or after 1 October 2008.

Managers of these funds should note that, by making exempt supplies, a restriction on the recovery of input VAT will be suffered under the partial exemption rules. Although the changes will be introduced on 1 October 2008, HMRC has previously announced that the exemption for the management of investment trust companies can apply retrospectively. The same is likely to be true for the management of other funds covered by these changes. Managers should therefore consider submitting claims for VAT overpaid on these services.

Similarly, qualifying investment funds should also consider submitting claims to investment managers for overpaid VAT. Any claims should be submitted as soon as possible, due to the three year time limit for claims.

More Budget 2008 news - Click here

Looking for a past edition of VAT news? Click here

VAT news -January 2008.Click on the links below:

Landmark tribunal case - Conde Nast

HMRC face the possibility of having to make large refunds of VAT after losing a landmark tribunal case against publishers Conde Nast. The House of Lords approved an earlier Court of Appeal ruling that stated HMRC could not place a three year cap on reclaims of overpaid output tax.

The three year rule was introduced almost overnight in 1997, and gave traders no opportunity to submit retrospective claims beyond the three year cap.

As a result of this decision HMRC are now obliged to provide all taxpayers with an opportunity to familiarise themselves with the new rules, and enjoy a period of grace to submit claims. It has been estimated that the amount of VAT that HMRC may have to repay as a result could reach a staggering �1billion.

We understand that until a suitable transition period is confirmed the current 3 year time limit may be disregarded. Affected clients may submit claims for input tax incurred prior to 1 May 1997 � the date the inadequate new rules were implemented. In addition to this, clients could possibly submit a claim to HMRC for output tax that was overpaid for periods until 4 December 1996.

It is recommended that claims are submitted as soon as possible, given that HMRC will be in process of creating new legislation to deal with the position.This new legislation could be introduced in as little as six months.

If you have any clients who may be affected please contact the VAT team.

Carousel fraud - Livewire telecoms appeal win

There is speculation that HMRC could face large VAT repayments following Livewire Telecom�s appeal win on Carousel fraud.HMRC originally refused to repay VAT to Livewire as it believed Livewire should have known it was implicated in a carousel fraud.

The tribunal decided that there was no way that Livewire could have known it was involved in an MTIC fraud, and HMRC was not justified in retaining the VAT.

This decision could open the door for others to consider making a request for withheld input tax to be repaid. HMRC are currently considering whether they should appeal the tribunal�s decision.

Residential Renovations: changes to the VAT rules

From 1st January 2008 the VAT rules associated with the renovation of existing residential dwellings changed.Where a dwelling has been unoccupied for 2 years the renovation of the property will now attract VAT at the reduced rate of 5%.

Contractors who are renovating residential properties that have been empty for at least 2 years on 1 January 2008 should only account for VAT at 5% on supplies that take place on or after that date.Contractors should ensure that they are fully aware of the tax point rules when determining the time of their supplies.

Whilst the onward sale of the renovated property will still be exempt (and as such all associated input tax blocked from recovery) these rules allow VAT on the cost of renovations to be reduced by 12.5%.

If you would like a copy of our VAT ready reckoner which will help you to calcuate your VAT liability for construction and renovations project or if you require any further clarification, please contact Scott Craig, VAT Partner.

Reduction to turnover limit for the VAT Flat Rate Scheme

The VAT flat rate scheme allows eligible businesses to charge VAT on taxable supplies but only account for a percentage of the VAT collected (the percentage is based on business activity). Businesses that join the scheme are precluded from recovering any input tax (with the exception of capital items that cost in excess of �2,000).

The scheme was intended to simplify VAT accounting for small businesses (especially those that do not incur significant amounts of VAT on expenditure).

It has been noticed that HMRC has reduced the turnover limits for the flat rate scheme without making any formal announcement. Previously the total turnover limit for businesses joining the scheme was �187,500 excluding VAT however in HMRC�s most recent Notice (March 2007) the limit has been changed to �187,500 including VAT.

This change will ultimately reduce the number of businesses that are eligible to join the scheme and appears to contradict HMRC�s policy of simplifying VAT accounting.

VAT on management charges incurred by Investment Trust Companies (ITCs)

Until recently only open-ended investments such as OEICs and unit trusts enjoyed VAT exemption of their management expenses.

HMRC have now confirmed that Investment Trust Companies (ITCs) can enjoy the same exemption and no longer suffer the cost of irrecoverable VAT on management charges.

It was initially thought that Venture Capital Trusts and other types of pooled investments (such as pension funds, unit-linked life assurance policies and investments clubs) would also benefit from the exemption however HMRC has confirmed that the exemption is only extended to ITCs. Other types of pooled investment funds will not therefore benefit.

Any protective disclosure claims that were submitted to HMRC (on the basis that the exemption would be extended to other types of pooled investment) are now expected to be rejected by HMRC.

Reduced rate VAT on construction services

It was recently announced that the scope of the reduced VAT rate on construction services would be extended. Currently, owners of homes that have been empty for at least three years can benefit from the reduced rate of VAT (5%) on any works of renovation or alteration.

With effect from 1 January 2008, homes that have stood empty for just two years will now qualify for the reduced rate of VAT on renovation or alternation works.

Before applying the reduced rate building contractors will have to be satisfied that the dwellings in question have been empty for 3/2 years. In such cases, evidence can take the form of council tax or electoral roll data, or a letter from an empty property officer at the local authority.

European Commission proposes to remove the Lennartz mechanism

Ordinarily, VAT incurred on expenditure is only recoverable to the extent that it is used in the course of furtherance of a business (subject to partial exemption). VAT relating to non-business activities is normally blocked from recovery.

Following the introduction of the Lennartz mechanism some bodies have been allowed to recover the VAT that is attributable to non-business activities on the condition that they �self account� for output tax (effectively paying back the VAT) across the economic life of the asset. The Lennartz mechanism provides significant cash flow benefits particularly to organisations with non-business activities that are incurring significant costs on construction projects.

The European Commission recently published a proposed Directive which would effectively remove the Lennartz mechanism for expenditure incurred on land and buildings. Under the proposal the business would be required to block the VAT attributable to non-business activities (up front) and monitor the non-business use of the asset alongside the capital goods scheme (10 years).

If approved this proposal would effectively remove the cash flow benefit available to those businesses that have non-business activities and are incurring costs on construction projects.

Changes to VAT guidance and procedures - have your say!

HMRC constantly review VAT legislation and procedures and regularly request 3rd party comments on consultation papers. Some of the most recent consultations include:

HMRCs proposals for modernising and streamlining the way HMRC deals/handles appeals against its decision.
HMRCs proposals to change the Tax Avoidance Disclosure regime to improve the identification of users of disclosed schemes

All consultations are published at:

http://www.hmrc.gov.uk/consultations/index.htm

Each consultation document provides a deadline for submission of comments and details of whom/where comments should be submitted.

Mixed or single supply? Highland Council

Highland Council operates a number of leisure facilities including sports centres and swimming pools. It sold 'leisure cards' entitling holders to use these facilities. HMRC issued a ruling that it was required to account for VAT on the sale of these cards.

The Council appealed, contending that as some of the relevant facilities qualified for exemption, a percentage of the income from sales of leisure cards should be treated as exempt. The tribunal rejected this contention and dismissed the appeal, holding that the Council was making a single standard-rated supply of a right to receive services.

The Court of Session unanimously upheld the tribunal decision. Lord Penrose held that 'the legal relationship governing the cardholders' use of the facilities is created on payment' and was 'the provision of a contractual right to use the appellants' facilities'.

From analysing this case, it was apparent that the majority of the benefits available to cardholders were actually liable to VAT. However, as the Council could not determine exactly how each card would be used (i.e. the mixture of standard-rated and exempt benefits that would be consumed by cardholders) the Court agreed with the Tribunal that card entitled the holder to a right to receive services rather than participate rather than a specific (and identifiable) supply leisure services.

With this in mind where you have a client that is offering mixture of services (with different VAT rates) for one price and it cannot separately identify the actual amount (and VAT liability) of the services that will be consumed, it may be supplying a �right� and as such the whole supply could be liable to standard rate VAT.

More VAT news and articles: VAT News Archive

Sign-up to receive an electronic reminder when the next edition of VAT News and Business Alerts are published: click here

print this page

VAT News

Keeping you up-to-date with the latest VAT developments and announcements from HMRC.