VAT News Archive
Past editions of VAT News:
VAT articles and opinion pieces:
VAT Cultural Exemption - a strong wind of change
Tax Briefing Winter 07-08: VAT round-up (p10) partial exemption, carousel controls and invoice changes.
Tax Briefing: The Joy of Lennartz.
Recovering VAT - In return for financial assistance I was required to pay the banks legal and due diligence costs. Can I recover the VAT incurred?
Charity Briefing: VAT guidance relating to business and non-business activities.
VAT News - Chancellor's Budget 2007
Click on the links below for the VAT news and impacts from the Chancellors Budget on 21 March 2007.
- HMRC tackle carousel fraud - but is it fair?
- Restriction on the use of the 'Lennartz' principle
- New VAT registration threshold
- New VAT fuel scale charges
- HMRC help to stop smoking
- TOGC's and record keeping requirements
- Games of chance
- VAT payment arrangements
For more Budget 2007 reaction and commentary, click here to view our Budget Briefing 2007.
HMRC tackle carousel fraud, but is it fair?
As you may be aware, the Treasury is losing millions of pounds each year through carousel fraud essentially this is an illegal scheme whereby one party (or more) in a supply chain disappears without ever paying over the output tax due on its sales.
While it is clear that some companies within the chain will be aware and participate in the fraud, it is entirely possible that innocent parties are also caught within the chain.
To clamp down on the loss to the Revenue, legislation will be introduced in Finance Bill 2007 (taking effect from the date of Royal Assent) to place joint and several liability on any traders of 'specified goods' within a fraudulent supply chain whereby HMRC believe the trader had reasonable grounds to suspect that VAT would go unpaid elsewhere in the chain.
HMRC believe that reasonable grounds could be proved if the business purchased goods for less than open market value or less than the price payable for them by a previous supplier. That presumption is rebuttable by proof that the low price payable for the goods was due to circumstances unconnected with a failure to pay VAT.
Please note that the term 'specified goods' will include electronic equipment ordinarily owned and used by individuals for leisure, amusement or entertainment, i.e. mobile phones, computers (inc. SatNavs), and related parts and accessories.
It will be interesting to see how far HMRC pursue the joint and several liability and whether they simply block the equivalent value of input tax recovery by the relevant trader.
Restriction on the use of the Lennartz principle
Following the basic rules any trader that uses an asset for both business and non-business purposes must make an apportionment to restrict the non-business use. However, in light of the European case of Lennartz, you can now recover all of the VAT up front as though it were used for business, but must account for output tax on a deemed self-usage charge to take account of the non-business element.
In essence this provides a great cash flow advantage in the form of an interest free loan from HMRC, whereby they can recover VAT that would ordinarily be blocked on the condition they repay this over the economic life of the asset.
Until now, HMRC have accepted that the economic life expectancy of an asset would normally be capped at 5 years for most smaller items and 20 years for larger items such as capital works.
HMRC believe that the 20 year period for capital assets is too long and consequently changes will be introduced from 1 September 2007 to reduce this to 10 years (in line with the capital goods scheme). Although this will not be implemented retrospectively, it does give HMRC additional powers to review existing methods (which have been previously agreed) and amend them to effective shorten the review period.
In summary, although Lennartz accounting will still be available for capital items, it will not be as attractive as the repayment period will effectively be cut in half.
New VAT registration threshold
HMRC have announced a fairly substantial rise in the taxable turnover VAT registration threshold from £61,000 to £64,000. This threshold applies to any business whose taxable turnover will exceed £64,000 in a rolling 12 month period, or who has grounds to believe that the value of taxable supplies in the next 30 days alone will exceed £64,000.
The VAT de-registration threshold has also risen accordingly from £59,000 to £62,000.
Businesses which recover input tax on fuel which is used for both business and private motoring are required to account for output tax on the deemed self-supply by virtue of a fuel scale charge. In the past these have been set by the engine type and size, however, they will now be based on CO2 emissions in line with other Government policies.
Businesses must use the new fuel scale charges from the start of their first VAT return period beginning on or after 1 May 2007.
Click here todownload the new fuel scale charge tables.
From 1 July 2007 HMRC will apply the reduced rate of VAT (5%) to any over the counter sales of smoking cessation products. The reduced rate will apply for one year and will take effect alongside the introduction of the ban on smoking in public places in England.
N.B. smoking cessation products that are dispensed on a prescription remain zero-rated.
TOGC'sand record keeping requirements
Currently if a business acquires another business as a transfer of a going concern (TOGC) it is required to pass all of its books and records to the purchaser, unless the seller obtains permission from HMRC to retain the records.
In practice, most small to medium sized organisations prefer to retain these books and records, especially given the fact they may continue to trade under the guise of a different part of the business or an alternative trade.
These rules will be amended with effect from 1 September 2007 to allow most businesses to retain their records. The only exception to this will be in the few cases where the buyer chooses to retain the seller's VAT number. Sellers will be obliged to provide the buyers with relevant details to enable them to comply with VAT obligations e.g. details of Capital Goods Scheme adjustments.
Legislation will be introduced in Finance Bill 2007 to update VAT law on participation fees for playing bingo or other games of chance in the light of the Gambling Act 2005.
Under current legislation, participation fees for bingo and other games of chance are treated as either taxable or exempt depending on the circumstances. However from 1 September 2007 most of the exempt games will become liable to standard rate VAT. There will be some exceptions to this including small scale cash bingo, prize bingo, and gaming played for fund raising purposes (subject to monetary limits prescribed by law).
HMRC are continuing to encourage the use of electronic payment by introducing new regulations which will treat the date of payment by cheque as being the date the funds are cleared into HMRC's account (rather than date of receipt of the cheque). The new rules will apply from the dates that requirements to pay electronically start to be phased in - currently from 2010 for VAT returns.
Click on the links below for more:
- Cash Accounting
- Construction Services
- Partial Exemption
- Management Charges
- Update on Gaming Machines
- VAT Registration
- HMRC Target Shooting Rights
- Doctors
- Irish VAT Reclaims
Did you know that the EC derogation allowing UK businesses to use the Cash Accounting Scheme ended on 31 December 2006? While the UK Government has been in discussions with the other member states to agree a renewal of this it has yet to be formalised. The other member states have accepted that once confirmed this will be backdated to 1 January 2007 to ensure that there is no break in the legal cover.
Although there were rumours at the last budget that the cash accounting scheme limits would be increased in to £1,350,000 (in line with the annual accounting scheme) this has not materialised and the limits remain at £660,000 for new users of the scheme (£825,000 for those already within the scheme).
Remember that service providers can use pro-forma invoices as an alternative to cash accounting. By issuing a pro-forma invoice (i.e. not a tax invoice) a business can request a payment without creating a VAT tax point. It would only have to account for output tax to HMRC when a payment is received or an official tax invoice is raised. The main benefit of this arrangement (over the cash accounting scheme) is that VAT incurred on expenditure can be recovered as soon as an invoice is held as opposed to the date the invoice is paid.
back to January 2007 headlines
A house was severely damaged by fire. Its owner arranged for the demolition of what remained of it, and subsequently arranged for the construction of a new building. The Commissioners issued a ruling that VAT was chargeable on the demolition work. The owner appealed, contending that the demolition should be treated as zero-rated on the grounds that it had been undertaken in the course of construction of the new building. The tribunal rejected this contention and dismissed the appeal, finding that the demolition of the old building was not an 'integral part' of the construction of the new building.
It is widely recognised that developers can treat services of demolition and site clearance as ‘closely related’ to the construction of a new building. The key issue however is the timing between the demolition of the old and the construction of the new building.
We would recommend that any individuals in a similar position ensure that the contracts for demolition and construction are aligned to ensure that zero-rating can be applied.
back to January 2007 headlines
It’s fast approaching the end of everyone’s VAT year (March, April or May depending on the stagger of VAT returns) and those businesses that generate or have generated exempt income may be required to perform year-end adjustments. These include:
1.Partial exemption annual adjustments – due on the first return following the VAT year-end.
2.Capital goods scheme adjustments – due on the second return following the VAT year-end. The purpose of this is to monitor the taxable use of capital expenditure with VATable costs in excess of £250,000 (i.e. acquisition, construction or renovation).
There will be a change to the process of agreeing special partial exemption methods from 1 April 2007. From this date any application to use a special method will need to sign a declaration stating that “to the best of its knowledge and belief” that the proposed method is fair and reasonable.
Once you have agreed a special method with HMRC it cannot normally be retrospectively reviewed or adjusted. However following the implementation of this declaration, HMRC will have additional power, where they believe that the business knew the method was not fair and reasonable, to apply retrospective changes.
HMRC have stated that this declaration should allow them improve the turnaround of the review and approval process for such applications. We will withhold our judgement on this until such time as this becomes clear.
back to January 2007 headlines
In a recent VAT case a company claimed that the tax point for management charges made to an associated company was on completion of the annual accounts (when the charge was finalised). The VAT Tribunal ruled that as the charges related to monthly salaries of staff, the tax point was the month in which the salaries were paid to the staff. This was supported by the accounting arrangements between the companies.
Normal VAT rules state that a tax point is created at the earlier of the date an invoice is issued or payment is received. This case shows that tax points can also be created by accounting entries, business records or when annual accounts are signed off by the directors.
back to January 2007 headlines
HMRC have indicated that gaming machine takings within the UK have always been (and remain) subject to standard rate VAT. Consequently claims based on the Linneweber decision are likely to be rejected as the UK has not applied different VAT liabilities to gaming machines. HMRC will only consider claims where the claimant can show that their gaming machines should be treated differently for VAT purposes. It will be interesting to see whether any UK claimants can successfully challenge HMRC on their view. If so, HMRC may be forced to revisit similar claims that have been rejected.
back to January 2007 headlines
HMRC have issued a new VAT 1 Form. This came into effect from 1st December although the old forms can be used until 31st March 2007. The form and guidance notes can be downloaded from www.hmrc.gov.uk. HMRC have also recently published a warning that it may take up to 12 weeks to issue a registration number and have asked applicants not to phone until after the twelve week period. This delay is due to additional checks that have been imposed to combat missing trader fraud. Such lengthy delays in issuing registrations will undoubtedly give rise to difficulties for some new traders.
back to January 2007 headlines
We understand that HMRC are currently carrying out inspections of farms and estates that have shooting rights to ensure that VAT is being accounted for correctly. They are particularly interested in those businesses who claim to supply zero rated birds rather than making wholly standard rated shooting charges.
back to January 2007 headlines
HMRC issued two guidance briefs to the medical profession in December and January and have updated Public Notice 701/57 for Health Professionals.
The first guidance (VAT information sheet 12/2006) concerned dispensing GP practices. This provides general guidance on the VAT liability of medical supplies and outlines partial exemption issues specific to medical practices. The changes to NHS funding from 1st April 2006 led to an increasing number of dispensing GP practices (who make zero rated dispensing supplies) registering for VAT. Having reminded VAT registered doctors of partial exemption issues, it is likely that this will be followed up by HMRC visits.
Changes to exempt medical services were announced in Business Brief 6/2007 and are effective from 1st May 2007 (subject to parliamentary approval). These changes follow a recent consultation exercise after the European Court decision in the d’Ambrumenil case, this confirmed that VAT exemption did not cover provision of certificates on a person’s medical condition for benefit entitlement purposes, medical examinations or reports to support litigation.
The new rules will restrict the VAT exemption of medical services by appropriately registered practitioners to those services that intended principally to protect, maintain or restore the health of an individual. In simple terms services beyond the scope of medical care are likely to be standard rated. This will include medical examinations and reports for litigation, compensation, benefit and certification purposes. However insurance-related medical services for the setting up of contracts, administration of policies and handling of claims remain exempt under rules that apply to insurance services.
Health professionals who are already registered should review their non-NHS services to ensure standard rating is correctly applied from 1st May. Professionals who are not VAT registered will need to monitor their taxable income to ensure compulsory registration thresholds are not breached. The new rules also provide an opportunity for more health professionals (beyond the dispensing GP’s or those engaged in medico-legal services) to become VAT registered and (subject to partial exemption rules) claim a proportion of the VAT incurred on general overheads or capital expenditure.
back to January 2007 headlines
The address for submission of Irish VAT reclaims has changed. VAT 60 EC forms should now be sent to Office of the Revenue Commissioners, Strategic Planning Division, Accountant General’s Branch, River House, Charlotte’s Quay, Limerick, Ireland.
We believe the information in this Business Alert to be correct at the time it was sent, but cannot accept any responsibility for any loss occasioned to any person as a result of action or refraining from action as a result of any item herein.
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