If you have submitted VAT refund claims in the past, you may be due additional interest payments following a recent High Court decision.

HMRC have always paid simple interest on VAT refunds. This position came under threat following the Direct Tax case “Sempra Metals” which ruled that taxpayers should receive interest on a compounded basis.

A number of car dealers who had received refunds on demonstrator cars, went to the High Court (Group Litigation Order) to request that compound interest be paid.

The Court recently ruled that compound interest should be paid. However, the car dealers’ claims were out of time under statutory time limits.

There is also a separate VAT tribunal case to be taken by British Telecom on the same issue. This case is due to be heard in June.

Businesses which have had claims paid with interest in the last three years should now consider whether to submit further claims to HMRC for compound interest.  Compound interest can amount to three or four times the original claim.

Businesses which have been paid claims going back more than 3 years (under the Fleming case ) may also be entitled to compound interest. Professional advice should be sought as this is a complex issue.

 

Comment on this blog in the space provided below, or visit my profile for details of how to contact me.

Jane Stacey is a VAT Manager at Mercer & Hole.

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It is understood that HMRC is once again reviewing the VAT recovery position of deal costs.

Historically this issue has been the subject of a series of legal challenges and resulted in the ECJ case Kretztechnik (C-645/03), which many thought had resolved much of the conflict in this area. In 2005, HMRC issued several Business Briefs which confirmed that the VAT incurred on the issue of new shares as part of a refinancing exercise was recoverable as an overhead of the business raising the finance. VAT incurred on the sale of existing shares (an exempt supply) was irrecoverable. 

Following a direct tax review of the issue, HMRC are thought to be once again challenging VAT recovery in this area. The basis of their current challenge appears to be focussed on the timings and stages of a typical Corporate Finance (“CF”) deal. Normally, following the appointment of CF advisers and the completion of the due diligence work, a Newco is established fairly late in the process. This Newco is usually then included in a VAT group with the existing company and its subsidiaries. The VAT on costs incurred by Newco is then recovered in the first VAT return of the VAT group (subject to any partial exemption restrictions). 

HMRC are once again challenging VAT recovery by Newco on the basis that the services provided by advisers cannot be supplied to Newco as this company did not legally exist at the time the engagement letters were agreed and signed. A further possible challenge relates to situations where the professional services are jointly supplied to Newco and the bank/investors. 

Neither of these points are new or insurmountable. However, if you are considering a refinancing exercise which involves the issue of new or existing shares, you should not assume that all VAT on costs is recoverable. In view of the levels of professional fees charged for CF work, the VAT could be significant and impact on the cash flow models. 

It is understood that there is a test case on this issue going to the VAT tribunal. Until this case is heard and the decision given, the current position appears to be once again uncertain.

Engagement letters should be drafted in the light of the above and consideration given to the VAT position at an early stage. 

This looks set to become the next legal battleground in the ever increasing complex world of VAT!

Comment on this blog in the space provided below, or visit my profile for details of how to contact me.

Jane Stacey is a VAT Manager at Mercer & Hole.

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Do you operate the partial exemption standard method? 

If so, you should be aware that HMRC have recently issued information sheet 4/09 which outlines four changes to the partial exemption standard method for VAT returns commencing on or after 1 April 2009. 

Three of the changes are optional and do not need approval from HMRC. The three optional changes are known as:

• In-year provisional recovery rate
• Early annual adjustment
• Use-based option for new partly exempt businesses 

The final change, which is known as – widening the scope of the standard method is compulsory and affects businesses that make:

• Supplies of services to customers outside the UK
• Certain financial supplies such as shares and bonds
• Supplies made from establishments located outside the UK

Full guidance on how the changes apply are set out in the Information Sheet. 

These changes aim to simplify the partial exemption rules and reduce compliance costs for businesses, both of which are welcome steps in an ongoing attempt to simplify this area of the tax.

Comment on this blog in the space provided below, or visit my profile for details of how to contact me.

Jane Stacey is a VAT Manager at Mercer & Hole.

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It was a fairly uneventful VAT budget.

The Chancellor confirmed that the standard rate of VAT will revert back to 17.5% on 1 January 2010 as previously announced. Draft “anti forestalling” legislation has already been published and will be introduced in the Finance Act 2009 to prevent certain exempt businesses from planning to benefit from the rate increase.

There was speculation beforehand that the standard rate of VAT would increase to at least 18.5% and/or that the Chancellor would make use of new powers to extend the reduced rates of VAT but neither of these has happened.

Other VAT changes announced are:

• The annual VAT registration threshold has been increased from £67,000 to £68,000. The annual threshold for deregistration has been increased from £65,000 to £66,000.
• Revised fuel scale charges will apply to VAT returns on or after 1 May 2009.
• VAT exemption will apply to gaming participation fees (bingo and other games of chance) with effect from 27 April 2009.
• The rate of bingo duty will increase to 22% for any accounting period beginning on or after 27 April 2009.
• Other miscellaneous changes to the rules for bingo and games of chance.
• A package of changes to harmonise cross border supplies of goods and services and to reduce fraud, will be introduced on 1 January 2010 as part of an EU wide exercise. The UK has announced new rules in relation to EC Sales Lists for goods and services, overseas VAT refunds and the time and place of supply of certain cross border services.  
• A reduced VAT rate of 5% will apply to bases for child car seats.
• A minor simplification of the option to tax 'permission' rules where previous exempt supplies have been made.

Comment on this blog in the space provided below, or visit my profile for details of how to contact me.

Jane Stacey is a VAT Manager at Mercer & Hole.

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As mentioned in earlier blogs, this year’s Budget will be given by the Chancellor on 22 April 2009 – it has been delayed until after the G20 summit, which is then immediately followed by the Easter recess.

At this time of year many tax professionals try to second-guess what the Chancellor may announce in his Budget. Turmoil in the world’s markets makes these predictions harder than ever – he needs to increase the tax take, but will higher taxes cripple an already weakened economy?

We do know that the rate of VAT is set to revert to 17.5% on 1 January 2010. There are already cries for the 15% to be retained, but if it does go up next year would he be tempted to fix the rate at 20%?

Scrapping higher rate tax relief on pension contributions has often been put forward as something the Chancellor might consider – will this be the year that it happens?

As usual, we will just have to wait and see! 

We will be blogging on Tax Plus Blog and SME Plus Blog on Budget day.  If you do not already subscribe to our blogs click here for Tax Plus Blog or here for SME Plus Blog to ensure you get our comment and analysis as and when it happens.

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We reported in a blog on 26 Feb 2009, on an ECJ case decision which had cast some doubt over the UK’s treatment of VAT on business entertainment.

Following this decision, HMRC are considering the issue. In the meantime, they have issued a statement which invites businesses to consider making historic VAT refund claims for UK VAT paid on overseas client entertainment.

Prior to 1988, VAT was recoverable on overseas client entertainment. From 1988 , such VAT was blocked. As such, under the terms of the recent Conde Nast/Fleming decisions, claims can now be submitted for the period 1988 to 1997. The deadline for such claims is 31 March 2009.

HMRC have also said that in their view this decision does not affect VAT on UK client entertainment. This remains to be seen and it is likely that there will be further litigation on the matter.
 

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HM Revenue & Customs (HMRC) has announced the latest interest rates charged on late payments of and paid on overpayments of tax.

The reduced rates that cover quarterly instalment payments of Corporation Tax take effect from 16 March 2009. The rates for all other direct and indirect taxes, including National Insurance contributions paid, take effect from 24 March 2009. The rate of interest:

• On late payments of Income Tax, National Insurance contributions, Capital Gains Tax, Stamp Duty, etc. changes from 3.5% to 2.5%, while on overpayments of these taxes interest remains at 0%.
• On late payments or repayments of Inheritance Tax changes from 1% to 0%.
• On underpaid instalment payments of Corporation Tax changes from 2% to 1.5 % while on overpaid instalment payments of Corporation Tax, and on Corporation Tax paid early (but not due by instalments) the rate changes from 0.75% to 0.25%.
• On unpaid Corporation Tax changes from 3.5% to 2.5% and on overpaid corporation tax remains at 0%.
• On under-declared or over-repayments of VAT, Air Passenger Duty, Insurance Premium Tax, Landfill Tax, Climate Change Levy, Aggregates Levy changes from 3.5%to 2.5%.

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The Finance Act 2008 has introduced a number of changes to compliance which will take effect from 1 April 2009.

The main changes are:

• HMRC will have one set of powers covering PAYE, VAT, Income Tax, Corporation Tax, Capital Gains Tax and Construction Industry Scheme to visit and inspect businesses and records and to request information and documents
• Greater flexibility in setting record keeping requirements
• New time limits
• Safeguards for taxpayers

For VAT, the time limits for assessments and claims will be increased from three to four years. The legislation ensures that claims that are already out of time are not brought back into time.

HMRC has published an e-learning package on its website. This sets out the new framework in more detail.
 

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Do you provide free business lunches to clients/business contacts? Have you restricted the VAT incurred on such lunches? If so, you may be interested in a recent European Court decision.

The Danfoss A/S, AstraZeneca A/S case(C-371/07) involved the provision of free meals in the staff canteen to health professionals attending business meetings at the appellant’s premises. The ECJ judgement has confirmed that such lunches may have a business purpose where the meal is provided to improve the efficiency of the meetings and if there is a business purpose, then the VAT is deductible.

This decision has cast some doubt over the UK’s treatment of VAT on business entertainment, and in particular, for working lunches.

UK VAT law restricts the recovery of VAT on business entertainment including in house lunches provided free of charge to clients during business meetings and to staff hosting such meetings.

This decision may mean that UK law may be too widely drawn. It remains to be seen whether further litigation on this issue will be pursued in the UK Courts. In the meantime, businesses may wish to consider submitting protective VAT claims, pending the final outcome of this matter.

Claims submitted for VAT incurred prior to 1 May 1997 (under the terms of the Conde Nast/Fleming cases) will have to be submitted by 31 March 2009.

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Does your business submit VAT returns on a calendar quarterly basis? If so, then beware as you are now within the new penalty regime for errors.

My colleague Cathy reported on the new regime in her blog in April 2008.

March 2009 VAT Returns (due to be submitted by 30 April) will be subject to the new penalty regime which means that even careless errors could incur a penalty of up to 30% of the VAT amount.

Businesses should take extra care from now on to ensure that VAT returns are accurate and that careless errors are not made. VAT accounting procedures should be reviewed to identify any areas of weakness and to minimise the risk of a penalty being imposed.

If your business has a history of making voluntary disclosures or receiving regular assessments, you should urgently review VAT procedures to eliminate any unnecessary errors going forward.
 

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Whilst it seems a little unusual to think of depositing money with HMRC rather than with a bank, if you do have spare cash this may be something worth considering.

Just to put matters in perspective, for companies that overpay “ordinary” tax, interest is paid thereon at 2% and for tax paid early or for over-paid quarterly instalments the Revenue are paying at 2.75%, both of these are taxable.

For individuals who have overpaid tax the Revenue are paying 1.5% interest on a tax-free basis. 

Interest is not accrued if you choose to pay your income or capital gains tax early.

However, for individuals, there is the possibility of using Certificates of Tax Deposit. These were very popular some years ago but fell out of favour in times of rising interest rates. Regrettably they cannot be used for corporate tax, PAYE or VAT. Essentially deposits are purchased and the rate of interest, which is taxable, varies as to whether the certificate is cashed or applied against tax payments. The current rates are as follows:-

Deposit of under	Applied for tax	Cashed
£100,000 or less	1.75%	0.75%
£100,000 or over:
Months held
(a) under 1	1.75%	0.75%
(b) 1 but less than 3	4.50%	2.25%
(c) 3 but less than 6	4.25%	2.00%
(d) 6 but less than 9	4.25%	2.00%
(e) 9 to 12 months	4.00%	2.00%

If these rates are better than you would get from putting your money elsewhere, this may be something that is worth considering.

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The Chancellor delivered his Pre-Budget Report on 24th November 2008. Our Partners and Managers posted a number of blogs in relation to the 2008 Budget announcement – on both SME Plus blog and Tax Plus blog.

For concise, up-to-date and easy to digest Pre-Budget information please find below a list of the respective blogs posted: 

SME Plus 

Pre-Budget Report 2008 - VAT

Pre-Budget Report 2008 - Plant and machinery leasing

Pre-Budget Report 2008 - Income tax...relief for trading losses

Pre-Budget Report 2008 - Tax relief for business expenditure on cars

Pre-Budget Report 2008 - Corporation tax...small companies rate

Pre-Budget Report 2008 - Corporation tax...tax relief for trading losses

Pre-Budget Report 2008 - Empty property relief

Pre-Budget Report 2008 - Taxation of foreign profits

Pre-Budget Report 2008 - HMRC Business Payment Support

Tax Plus 

Pre-Budget Report 2008 - Non doms update

Pre-Budget Report 2008 - Income Shifting Rules...the dog that didn't bark!

Pre-Budget Report 2008 - Top rate of income tax to be increased to 45%

Pre-Budget Report 2008 - National Insurance to be increased

Pre-Budget Report 2008 - Consultation documents

Pre-Budget Report 2008 - VAT

Pre-Budget Report 2008 - Compensation for the loss of 10% band made permanent

Pre-Budget Report 2008 - Tax rate for trusts to be increased

Pre-Budget Report 2008 - Pension tax telief...freeze on limits

Pre-Budget Report 2008 - Changes to trusts...trust Darling!

Pre-Budget Report 2008 - Penalties for late tax returns

To receive our blogs direct to your inbox visit http://www.mercerhole.co.uk/news, click on the blog of your interest and follow a few simple subscription directions.

 

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As widely reported, the PBR today has confirmed that the standard rate of VAT will be cut to 15% with effect from 1 December 2008. (The new VAT fraction to be applied to VAT inclusive prices will be 3/23).

This means that standard rated supplies of goods and services made after this date will attract the new rate of VAT. Supplies at the zero or reduced rates and exempt supplies are not affected. The new rate will remain in place for 13 months till 1 January 2010, when it will rise again to 17.5%. (Anti- forestalling legislation will be brought in to prevent planning around the subsequent rate increase).

For sales spanning 1 December, special tax point rules mean that businesses can choose to charge VAT at the new rate on goods removed and services performed after the rate change, even if payment has already been received or VAT invoices issued. In those cases, credit notes will have to be issued to correct the VAT overcharged.

Special rules will apply to retailers, those providing continuous supplies of services (e.g construction industry) and other special schemes (second hand dealers etc). Detailed guidance on how to deal with the change is available on HMRC’s website.

The reduction in the standard rate will also amend the rates applied under the Flat Rate Scheme for small businesses. The revised percentages are published on HMRC’s website.

Other VAT and duty changes announced are;

Increase in threshold for Bespoke Retail Schemes with effect from 1 April 2009.
Simplification of the entry and exit rules for VAT Flat Rate Scheme with effect
from 1 April 2009.
Payment arrangements for those having difficulties paying VAT bills via the “Business Payment Support Service”.
Increases in fuel/alcohol and tobacco duty.
The Chancellor has urged retailers to pass on the rate cut “as quickly as possible”. In reality, businesses may choose not to pass on the cut. They are unlikely to welcome it as it will cost them to implement changes to prices /accounting and point of sale systems. In the retail sector, where prices are already being heavily discounted, it is hard to see that a further 2.5% cut will have much of an impact on sales turnover.
 

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We reported in February this year on the new place of supply rules for cross border services, due to come into effect on 1 January 2010.

One additional reporting obligation will also be introduced on that date. Those businesses providing services to businesses in other EU countries, will have to complete Electronic Sales Listing Reports (“EC Services Listings”). Currently such statistical reports are only required for cross border supplies of goods.

The new reports for services will report sales, who the customer is and where they belong. The purpose of these reports is to enable cross border “matching” of sales and purchases, to ensure the correct VAT amount is accounted for by the customer.

Businesses which are affected by the new changes should take early action to review systems and controls to identify how the new rules will affect them. The capture of this data may require system changes and even a new report to be generated. Finance staff involved in VAT return completion will have to understand the new rules to be able to apply them correctly.

It is worth noting that the new rules for penalties will already be in place (April 2009), when these new rules are introduced. The new penalty regime is based on “behaviours”. A penalty of 10- 30% for “failure to take reasonable care” will be payable. HMRC’s guidance on the new penalty system indicates that if a business unintentionally omits to do something that a reasonable person would be expected to do, then a penalty will be applied.

We expect there will be a considerable number of penalties imposed under the “careless error” category and it remains to be seen how HMRC will apply the rules in practice. HMRC have issued Business Brief 53/08 which outlines the requirements.

 

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In the current climate, many businesses will be experiencing cash flow difficulties and may be looking to restructure or refinance in order to raise much needed cash. At such a time, VAT is often overlooked but there can be a painful sting in the tail!

The first thing to remember is that if you have debtors of more than 6 months old, you can adjust for the VAT already paid to HMRC, subject to certain conditions. On the other hand, if you have unpaid supplier invoices which are more than 6 months old, you are required to adjust for the VAT you have already claimed on your VAT returns.

If you pay your VAT by electronic means, (e.g. BACS/CHAPS), you will have an extra 7 days to pay the VAT due.

If you are struggling to pay your VAT bills on time, you should contact HMRC before a due date is missed. Late submission of VAT returns/payment of the due amount will lead to default surcharges. Lack of funds is not a reasonable excuse for submitting late returns.

When you contact the local VAT office, you should request a “time to pay” arrangement. This normally means you will be allowed to pay in instalments. However, HMRC will be more likely to agree to this if your business has a good VAT compliance history. Therefore it is important to submit all VAT returns and payments by the due date for as long as this is possible. Also be aware that even if you have entered into a payment arrangement, you may still be liable to a penalty for not paying the full amount by the due date.

If you restructure your business and as a result, dispose of assets/shares, there may be VAT consequences. Professional advice should be sought as there may be simple ways to structure the transactions in a VAT efficient way. This is particularly relevant when disposing of property as the VAT amounts involved will usually be significant. There are many ways to minimise adverse cash flow, by completing the transactions in a certain way.

As a recent Business Brief issued to house builders showed HMRC appear to be sticking to the letter of the law, even in these difficult times!
 

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We reported in our blog of 16 April 2008 that the Budget (BN74) had introduced new rules for the extension of VAT exemption for fund management services with effect from 1 October 2008.

HMRC have now issued Business Brief 48/2008 which sets out details of the type of services which will be exempt from 1 October 2008. In summary, VAT exemption will now apply to management charges for collective investment schemes which are:

• All UK-established AUTS and OEICs ; or
• Recognised overseas schemes (as defined)
• Certain closed-ended investment funds such as Investment Trust Companies.

Businesses which are affected by these changes should consider their VAT position and take advice where appropriate.
 

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With the slow down in the property market, many businesses are unable to sell newly constructed property. The obvious solution is to try and rent in the short term until buyers can be found. However, this course of action could lead to a hidden VAT cost.

The sale (freehold or lease exceeding 21 years) of a new dwelling by the person constructing is zero rated for VAT purposes. This means that VAT incurred on the construction of such buildings is recoverable. In practice this may only be the VAT on legal and other professional fees, as most of the construction costs will be zero rated. However, in other cases, there could be significant VAT on builders materials.

However, if you let the building on a short term basis (any lease of less than 21 years), this will be an exempt supply. This means that you may have to pay back some of the VAT already reclaimed under the partial exemption “clawback” rules. The rules are complex but in essence, you will have to apportion the VAT already reclaimed on a fair and reasonable basis. If you do eventually sell the building, a further VAT adjustment can be made to reflect the actual use.

The clawback rules will also apply to the letting of converted property (i.e. commercial to residential). In such cases, there will be more VAT at stake as the conversion works will have been liable to VAT at 5%.

For commercial property, lettings are exempt unless you opt to tax. Prior to letting such property, you should seek professional advice as the option to tax is generally irrevocable for 20 years. This will mean that all future lettings and the eventual sale of the property will be liable to VAT. This decision could affect the marketability of the property, depending upon its location and type of buyer/tenant it is likely to attract. The rules for property and VAT are complex and the cost of getting it wrong can be very significant.

I would like to think that HMRC would take a lenient approach to this point, in the current climate. However, they are generally unsympathetic to cash flow issues, at this or any other time of economic difficulty. 

Useful links:

http://www.hmrc.gov.uk/briefs/vat/brief4408.htm

http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageLibrary_PublicNoticesAndInfoSheets&propertyType=document&columns=1&id=HMCE_PROD1_028865#downloadopt
 

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For periods commencing on or after 1 July 2008 HMRC have increased the threshold under which a business can make good errors or mistakes it has previously made when preparing its VAT returns.

Prior to this period any “errors” totalling over £2,000 had to be reported to the VAT man under the “voluntary disclosure" rules. Going forward this has been raised to a minimum of £10,000 with even higher thresholds for businesses with turnover of £1,000,000 who can correct themselves “errors” of up to 1% of turnover up to a limit of £50,000.

I see this as a welcome relaxation of the rules which will help to cut red tape for many businesses.

But beware, as there is no longer “disclosure” when an adjustment is made, then the adjustment will not meet the definition of a “disclosure” for the new penalty regime and hence penalties could still become due.

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Further to my colleague Roger’s comments in his blog of 30 April 2007, the High Court has recently overturned the Tribunal’s decision in part. The decision of the High Court was that the “enrolment fee” paid by members at the first meeting could be apportioned to reflect the printed matter element (zero rated leaflet/books etc). However, the fees paid for the subsequent weekly meetings were consideration for a single supply of “weight loss management services” which is standard rated.

The taxpayer appealed the decision in relation to subsequent meetings and HMRC cross appealed in relation to the first meetings. The Court of Appeal has recently issued its judgement which confirms that all fees paid by members are standard rated as a single supply.

This case demonstrates that it is becoming increasingly difficult to apportion income in cases of “apparent” mixed supplies.

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Following Lord Carter’s recommendations for increasing the use of online services, HMRC are planning a number of changes to its VAT Online services.

Currently it is possible to register for VAT and submit VAT returns online but the take up level is relatively low. This is despite the fact that online VAT registration tends to be quicker than the paper option and by submitting VAT returns online, businesses are allowed an extra 7 calendar days for the submission/payment of any VAT due. Payment of the VAT must be made by electronic means i.e. BACS/CHAPS, direct debit and bank giro credit transfer.

With effect from October 2008, HMRC will be extending its existing “Billpay” system to include VAT. This means that businesses who submit returns online will also have the option of paying online using a debit card.

Other proposals for the future include mandatory online filing of VAT returns for all newly VAT registered businesses and those already VAT registered with a turnover above £100,000. The proposed implementation date for this change is 1 April 2010, with the expectation that paper filing will be phased out completely by 2012.

HMRC are keen to involve businesses in the need for other changes/improvements to the VAT online service (such as the viewing of historical VAT return data online). Therefore, they have commissioned research into the extent and nature of the use of this service and the needs of those who will be accessing the system (particularly small and medium sized enterprises). They are also seeking views/comments from businesses and their advisers in general. Any comments should be e mailed to auriel.smith@hmrc.gsi.gov.uk .

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We reported on 28 April 2008 that new rules were to be introduced in relation to the option to tax (“OTT”) for land and buildings.

These new rules come into effect on 1 June 2008. HMRC have now issued a revised Notice 742A (June 2008). This Notice sets out the new rules and also replaces Information Sheet 03/08.

There are also a number of new and revised forms which are detailed at Annex 1 of the Notice and available to download from HMRC’s website.

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It is a fairly common misconception that charities are relieved from paying VAT. In reality, charities are subject to the same VAT rules as any commercial organisation, although there are a number of specific reliefs for certain supplies made to and by charities. For many years, charities and associated groups have made representations to the government to allow charities to reclaim the irrecoverable VAT which they incur. This has so far been unsuccessful. Therefore, if a charity’s taxable business income breaches the VAT registration threshold, it has to register and account for VAT in the normal way.

Charities will normally have a complex VAT position as they will be receiving a mixture of business income (taxable and exempt) and non business income. They may also set up a trading subsidiary to carry out any significant trading activity. This can lead to a complicated VAT recovery position, as VAT incurred on costs has to be attributed to the relevant income stream and will either be fully recoverable, irrecoverable or partly recoverable. There are a number of different ways of undertaking the VAT recovery calculations, with scope for improving VAT recovery rates by adopting the most advantageous method. However, the benefit of implementing a “special method” has to be weighed against the cost of implementing and undertaking the calculations for such a method. The use of a special method also has to be agreed in advance with HMRC. Methods have to produce a fair result and be easily checked.

Charities do benefit from certain VAT reliefs, including advertising, donated goods, aids for the disabled/handicapped and certain types of buildings. The charity will have to certify that zero rating applies. Again the conditions/rules are very precise and advice should be always be sought in cases of doubt.

Charities are increasingly finding new ways to raise funds and as a result, it is more likely that they will enter into activities/transactions which may have VAT consequences. For example, two charities working together in “partnership” may inadvertently create a VAT cost when recharging each other for services. Advice should always be taken when entering into new contracts or amending existing contracts. Unfortunately HMRC do not take a lenient approach to charities which make errors in their VAT returns and penalties/interest may be imposed.

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We reported in our blog of 16 April that there was likely to be further litigation in relation to whether pension funds should benefit from VAT exemption in relation to investment management services.

It has now been announced that the National Association of Pension Funds (“NAPF”) and Wheels Common Investment Fund (Ford/Jaguar/Land Rover group pension fund) will bring a joint challenge against HMRC at the tribunal. If this challenge succeeds, pension funds could submit VAT refund claims for the past 3 years and also for the period 1990 to 1996 in the light of the recent House of Lords Judgement in the Fleming and Conde Nast cases. The main beneficiaries will be private sector defined benefit pension schemes with segregated investments.

As previously advised, these pension funds should be discussing this issue with their fund managers and submitting protective claims as appropriate. Any rejected claims should be re-submitted to stand behind this appeal.

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The recent Budget announced changes to the rules for opting to tax property interests. Further details have now been published (BB24/08 and 03/08). The changes are due to come in on 1 June 2008 when the new legislation (rewritten Schedule 10 VAT Act 1994) becomes effective.

The changes are designed to simplify the complex rules and address some of the practical issues which have arisen since the option to tax was first introduced in 1989.

A summary of the main changes are:

• New rules for relevant associates (VAT groups)
• Certificates to disapply an option to tax for land sold to housing associations and buildings converted into dwellings
• New rules for intermediaries supplying buildings to be converted into dwellings
• Introduction of a “real estate election” (new way to opt to tax multiple property interests)
• Changes to the “cooling off” and revocation period
• Changes to the rules for obtaining permission prior to opting to tax
• Revised definition of “occupation”
• Changes to the scope of the option to tax
• New appeal rights
  

The new rules and changes are quite detailed and will mean that businesses should review their internal procedures, particularly those with large property portfolios. Further simplification changes are also expected.

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The European Court decision in Securenta has again cast doubt on the recovery of VAT on share issues and focused attention on the VAT position of holding companies.

Securenta was a German investment company dealing in land, acquiring financial holdings in other businesses and managing various other investments. It raised the necessary capital partly by means of an issue of shares. The ECJ ruled that VAT on the costs connected with the issue of shares was allowed only to the extent that the expenditure was attributable to economic activities. Non-economic activities where there was no right to deduct presumably included much of the investment activity undertaken such as acquiring, holding and selling shares and bonds.

Guidance on how HMRC will apply this decision is still awaited. Holding companies often incur significant legal and accountancy costs when issuing new shares and this case may make it more difficult to recover all of the VAT involved. Wherever possible holding companies should be part of a VAT group with their trading subsidiaries as this hopefully should minimise the impact of the decision.

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HMRC has published new guidance on the new penalty provisions that will apply from April 2008.

HMRC states that it has designed the new penalties so that:

• If people take reasonable care when completing their returns they will not be penalised.
• If they do not take reasonable care errors will be penalised, and the penalties will be higher if the error is deliberate.
• Disclosing errors before HMRC find them will substantially reduce any penalty due.

The new penalties initially apply to VAT, PAYE, National Insurance, Capital Gains Tax, Income Tax, Corporation Tax and the Construction Industry Scheme.

Further information can be found at:
http://www.hmrc.gov.uk/about/new-penalties/penalties-leaflet.pdf
http://www.hmrc.gov.uk/about/new-penalties/faqs.htm  

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In a response to an EU consultation, the ICAEW has called on the EU to reduce the administrative burdens on SME’s. One of the key areas of focus is VAT.

Whilst welcoming a number of recent changes which assist SME’s, the ICAEW highlights that VAT is the “single most burdensome tax area” according to a study carried out in 2006 by KPMG on behalf of HMRC.

In particular, the ICAEW has called for immediate action in relation to cross border services (extension of “one stop shop” principle recently introduced for certain services). It has also called for a resolution to the double taxation issues currently experienced by many SME’s.

The EU is due to finalise its proposals in June 2008.

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We reported in our blog of 2 November 2007 that VAT exemption for fund management services in relation to Investment Trusts (following the decision in the JP Morgan Claverhouse Investment Trust plc case) could extend to other types of investment vehicles, such as pension funds.

In November 2007, the European Commission published its proposals for a new VAT regulation to define VAT exemption for financial services. Under these new proposals, special investment funds would include pension funds.

The recent Budget also announced changes to the current UK VAT exemption with effect from 1 October 2008.

As we said in our earlier blog, it is still likely that there will be further litigation on whether a pension fund should always have been considered to be a special investment fund. Many pension funds and fund managers have already submitted protective refund claims, in view of the three year capping rules.

The EU proposals have not yet been adopted but it is thought likely that the pension fund changes will be implemented. This will have an impact on both pension funds and pension fund managers. It will be important to check contracts to assess whether VAT changes are covered.

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The ECJ has recently ruled that M & S should get its long awaited £3.5 million VAT refund. For those of you not familiar with this case, M & S have been litigating for many years to obtain a full refund of VAT charged in error on chocolate teacakes between 1973 and 1994. The UK tax authorities had refused to repay this VAT on the grounds that M & S would be “unjustly enriched” as it had passed 90% of the VAT overpaid on to its customers.

M & S was in a VAT payment position (that is, it owed HMRC money after deducting the VAT it paid from the VAT it charged). Prior to 2005, the UK tax authorities treated “payment” and “repayment” businesses differently in relation to unjust enrichment. This was found to be discriminatory and contrary to the EU principles of fiscal neutrality and equal treatment.

The European Court has referred the case back to the House of Lords in the UK for a final judgement.

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Has the recent ECJ court judgement Ministero dell’ Economia e delle Finanze v Part Service Srl  put another nail in the coffin of VAT planning? Until now, HMRC have reluctantly accepted that it is not possible to have a single supply for VAT purposes where there are two suppliers involved.

This case involved an Italian car leasing group which also provided finance to its customers. One company in the group leased the vehicles and another provided the finance elements. The group treated the finance element paid by the customer as exempt from VAT. The Italian tax authorities took the view that the amounts payable by the customer had been artificially split in order to reduce the VAT payable. The matter was then referred to the ECJ to determine whether (1) there can be an “abusive practice” under the principles established in the Halifax case when a tax advantage is the principal aim of a transaction or whether it has to be the sole aim to the exclusion of other economic objectives and (2) whether the transactions in this case could be considered to be abusive.

On the first question the Court ruled that there could be a finding of an abusive practice where a tax advantage constituted the principal aim of a transaction. On the second question, i.e. whether the structure in this case was abusive, the matter was referred back to the Italian National Court to apply the tests set out in the Halifax decision. However, the ECJ indicated that the legal and economic links between the suppliers and the apportionment of payments made by the customer indicated that this was an artificial structure put in place principally to reduce the VAT payable.

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The recent Budget announced that the “staff hire concession” used by employment businesses will be withdrawn with effect from 1 April 2009. 

This concession allows employment agencies to account for VAT solely on their margin when supplying temporary workers. This reduced VAT cost benefits those exempt/partly exempt sectors who cannot recover all of the VAT they incur, e.g. banking and insurance, private healthcare sector, charitable and certain educational /public sector bodies.

The UK government decided to withdraw this concession following changes introduced by the new Conduct Regulations in 2004. The concession has also been used for tax avoidance purposes. An extended period of review and consultation of the impact of these changes then occurred.

With effect from 1 April 2009, VAT will become due on the full consideration received from the client. As such, partly exempt businesses which employ temporary staff will suffer an increased VAT cost.

The delayed implementation date is to allow businesses to deal with the impact of the change, e.g. contracts may have to be renegotiated/systems changed etc. HMRC will continue to discuss the impact of the change with affected businesses.

Not all employment businesses use the concession, although it is widespread amongst the largest players in the market. However, if you currently use temporary staff and are paying VAT on the margin, your VAT cost will increase from next year. If you are able to reclaim VAT in full, this will only represent a cash flow cost.

You should be discussing this issue with your temporary staff provider now.

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The main VAT changes announced in the Budget today are;

1. With effect from 1 April 2008, the annual VAT Registration/deregistration limits have
   increased to £67,000/£65,000 respectively. 
2. Revised fuel scale charges will apply for VAT return periods beginning after 1 May 2008.
3. A transitional period has been announced for VAT refund claims to 31 March 2009. This follows recent litigation relating to the three year capping rules introduced in 1996/7.
4. Withdrawal of the staff hire concession with effect from 1 April 2009.
5. A package of simplification measures for the option to tax.
6. Extension of the VAT exemption for fund management services.
7. The limits for correcting errors on VAT returns have increased from £2,000 to the greater of £10,000 and 1% of turnover.
   
   Full details of these changes will be contained in our Budget Tax Bulletin to be issued shortly.
   
   

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My colleague Cathy Corns recently outlined the new penalty regime for both direct and indirect taxes to be introduced next year. This new regime will potentially mean that businesses will face higher penalties for errors in VAT return periods with a due date after 1 April 2009.

Under the current VAT rules, if a business discovers an error before HMRC has begun to make enquiries, it can either make a voluntary disclosure or where the VAT is less than £2,000, it can adjust the amount on the VAT return. By doing so, the 15% misdeclaration penalty (triggered when an error breaches certain thresholds) will automatically be waived. Also, a penalty will not apply where a business can convince HMRC that it has a “reasonable excuse” for the error. Under the new regime, the concept of “reasonable excuse” will no longer be grounds for waiving a penalty.

Instead, HMRC will determine the quantum of a penalty by reference to the amount of VAT at stake, the nature and behaviour of the offence that lead to an understatement of VAT and the extent of the disclosure by the business.

There has been no confirmation so far that VAT errors below £2,000 cannot continue to be adjusted on the VAT return, under the new regime. However, it may prove necessary to write to HMRC to disclose any error, regardless of the size and reason, even when the error can be put on the VAT return. This would avoid the potential for a 30% penalty for making “careless” errors.

Hopefully HMRC will confirm this point nearer the time. Watch this space….

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... is expected to take effect for periods starting after 31 March 2008 where the return is filed after 31 March 2009.

The new system distinguishes between different types of tax “offence” for example, heavy penalties for evasion, but an acknowledgement that genuine errors happen.

HMRC appears to want to encourage compliance and sees penalties as an essential element in enforcement.

The result is that the new penalties will apply to returns for income tax, corporation tax, pay as you earn, national insurance contributions and VAT.

The new regime seeks to grade the penalty to match the ‘offence’. There are effectively four categories:

• Innocent mistake; 
• Careless conduct; 
• Deliberate action, but not concealed; and 
• Deliberate action with concealment.
  

Innocent mistakes will no longer attract a penalty. The penalties for the other three conducts are laid down with prescribed reductions for disclosure (differentiating between prompted and unprompted). The proposed penalties range from 15% to 30%, for a prompted disclosure for ‘failure to take reasonable care’, to 100% of the tax due for a ‘deliberate understatement with concealment’.

It will be “interesting” to see how HMRC will distinguish between innocent mistakes and a ‘failure to take reasonable care’. This is likely to be an area for debate, dispute and potential litigation.
You should be aware that unprompted disclosures will reduce penalties to nil for potentially minor offences.

Additionally, in cases of ‘failure to take reasonable care’, HMRC has the discretion to apply a suspended penalty. If the correct procedure is implemented and adhered to, the penalty could be cancelled.

One thing that is clear is that a lot of businesses and individuals will be affected.

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HMRC have now issued Business Brief 07/2008 inviting businesses to submit claims for both input tax accrued before 1 May 1997 and also output tax claims for accounting periods prior to 4 December 1996.

There is no time limit for submission of these claims but if you have a claim, prompt action should be taken.

Further announcements are expected.

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If you are involved in providing cross border services, you may be affected by future changes to the place of supply rules under a “VAT package” agreed by the European Commission in December 2007.

Broadly the new rules (to take effect from 2010) will change the place of supply of “business to business” services to the place where the customer is situated. Supplies of services to consumers will continue to be where the supplier is established. However, there will be special rules (“one stop shop”) for telecoms, broadcasting and electronic services to consumers (delayed until 2015).

The package will also introduce a much needed improved system for businesses seeking refunds of VAT paid in other Member States. The EU VAT refund system will become fully electronic from 1 January 2010 thus ensuring a quicker and easier process. This is a very welcome change. For those of you who are familiar with the current paper system, it is extremely burdensome and can take 6 months or more to obtain VAT refunds from other countries. Under the new system, interest will be paid if Member States are late making refunds!

We will keep you informed of the changes as these become available.

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A recent decision in the case of Livewire Telecom LON/06/1365 has demonstrated the complexity of VAT fraud cases involving carousel fraud.

The appellant was a wholesale broker (exporter) of mainly new mobile phones. In the course of selling such phones, the company made the relevant checks on both suppliers and customers and the unique phone reference numbers “IMEI”. However, in 2006, HMRC refused to make a significant repayment of input tax on the basis that it suspected that the business was knowingly involved in “contra trading” in respect of 14 transactions. “Contra Trading” involves two separate supply chains, one “clean”, the other “dirty”. The dirty chain will include a “missing trader”. In this case, the appellant was part of the clean chain but HMRC claimed that it was knowingly involved in a carousel fraud.

The tribunal decided, on the evidence available, that the due diligence process of the business appeared to be flawed. However, the appellant could not have (nor ought to have) known of the fraud at the time the transactions took place. Interestingly the tribunal was also critical of the way HMRC presented its evidence and made suggestions as to how this could be improved for future cases.

Other businesses which have had input tax claims refused may now seek millions of pounds of VAT refunds.

HMRC are considering whether to appeal the decision.

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Have you had input tax (or output tax) claims capped by HMRC at 3 years? If so, a recent House of Lords Judgement will be of interest to you.

The judgements in two similar cases Conde Nast and Fleming have ruled that the introduction of the 3 year cap with effect from 1 May 1997 was in breach of the principles of Community law as it did not allow the taxpayer a reasonable transitional period in which to submit refund claims. As such it must be disapplied. This opens up the period for submission of old and new claims.

The Lords ruled that a prospective transitional period should now be allowed in order for taxpayers to make claims. Futhermore, as the three year cap has been ruled to be defective, this means that even taxpayers who have not yet submitted claims for input tax incurred before 1 May 1997 will have the opportunity to do so. It is not known how long the transitional period will be, but it could be as short as six months.

Therefore if you have had input tax claims capped in the past, you should now revisit these claims as a matter of priority. When the details of the transitional period are announced, such claims should be re-submitted.

This judgement also calls into question the position following the Marks & Spencer case (relating to overpaid output tax). It may also be possible that the transitional period for output tax claims could be "reopened". Therefore, any output tax claims (overdeclared VAT in the periods prior to 4 December 1996 ) which have been capped by HMRC should also be revisited.

Watch this space for further details...

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Further to my colleague Roger Bell’s comments in his blog posted on 30 April 2007, the High Court has recently overturned the Tribunal decision that part of the fee could be apportioned to reflect the printed matter element (zero rated leaflet/books etc).

The Court has now ruled that the fee paid for the weekly meetings is consideration for a single supply of “weight loss management services” which is standard rated.

This demonstrates that it is becoming increasingly difficult to apportion income in cases of “apparent” mixed supplies.

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With effect from 1 January 2008, renovations and alterations to residential properties that have been empty for at least 2 years will be eligible for a reduced VAT rate of 5%.

Further information on this reduced rate can be found by clicking here.

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Do you use business assets for private or non business purposes (e.g. a yacht/aircraft/computer)? Are you aware that you have a choice as to how the VAT paid on the purchase of such assets is treated? Continue Reading...

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As my colleague reported in August, businesses have been experiencing very lengthy delays in obtaining a VAT number. This was due to a backlog of applications with HMRC, due in part to increased checks to try and eliminate “carousel fraud”. Continue Reading...

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My colleague Roger Bell reported in July this year on an important European Court of Justice (ECJ) case involving the VAT treatment of fund management services.

The Times and the Association of Investment Companies today report that HMRC has withdrawn its appeal in the case of JP Morgan Claverhouse Investment Trust plc/Association of Investment Trust Companies v HMRC.
Continue Reading...

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Are you involved in sales promotion schemes? If so, you may be interested to hear of two recent Court of Appeal decisions which will affect the VAT treatment. These cases are the latest in a long line of cases dealing with business promotion schemes. Continue Reading...

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Do you use or provide a computer for home working? If so, you may not be aware of a change in HMRC policy.

Following the removal of the tax exemption for the loan of computer equipment by employers to employees (Home Computer Initiative (“HCI”)), HMRC have issued Business Brief 55/2007 which sets out the revised VAT policy in relation to computers provided by employers to employees who work from home.

Previously HMRC had been happy to accept that any private use of such computers could be ignored and that full VAT recovery was allowed. However, with effect from 15/8/07, HMRC will look for evidence that it is “necessary” for the employer to provide the computer in the first place. If this evidence is not available, then an apportionment of input tax will be required to reflect any private use element. It may be possible to agree a fixed percentage with HMRC.

Businesses providing computers under an existing HCI agreement can continue to reclaim full VAT until the agreement has expired (normally 3 years).

In practice, would a business provide a computer to employees unless it was necessary for them to carry out their duties? And how do you monitor the level of private use? Therefore, it seems that the best approach would be to argue that any private use is insignificant and should continue to be ignored.

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Are you involved in the international supply chain? If so, you may be becoming increasingly aware of the new AEO status due to be introduced on 1 January 2008.

AEO is a measure being introduced to improve global security in the supply chain. AEO certification will be recognised by customs authorities across the EU that a business is a reliable trading partner. It is not mandatory but accreditation may lead to less customs checks and improved clearance times for goods.

There are different types of AEO authorisation available and the application process is Continue Reading...

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A further ramification of the well publicised ‘carousel fraud’ has led to many SME clients facing long delays in routine VAT registrations.


Continue Reading...

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You will recall that currently the transfer pricing regulations apply mainly to large businesses (more than 250 employees and either turnover >in excess of euro 50m or assets in excess of euro 43m) on a UK to UK as well as UK to overseas basis.HMRC retain the right to challenge transactions in medium sized business but not small ones (small being less than 50 employees and either turnover or assets less than euro 10 million). Continue Reading...

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Investment trust companies (ITCs) are celebrating their victory at the European Court of Justice on 28 June when it was ruled that the term “special investment funds” can include closed-ended investment funds, such as ITCs. As a consequence they should benefit from the same exemption from VAT for fees paid for management services, as presently enjoyed by unit trusts and OEICs..

The case was brought by JP Morgan Fleming Claverhouse Investment Trust plc and The Association of Investment Companies. The Association say investment trusts have been unfairly charged VAT on management expenses since 1990 Continue Reading...

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H M Revenue & Customs have announced new advisory fuel rates which can be used by businesses to reclaim VAT on employees mileage allowances for business travel.

The new rates which apply to all journeys on or after 1 August 2007 are as follows:-
Continue Reading...

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Should HMRC pay you compound interest on VAT repayments? The House of Lords is due to hear the case of Sempra Metals Ltd v HM Commissioners of Inland Revenue on 16 May which although concerned with advance corporation tax will, it is thought, also have implications for VAT repayments.

HMRC have always paid simple interest on tax repayments but “Community law requires full compensation for the loss of the use of money; and full compensation for the loss of the use of money requires that interest is compounded…”. Not my words but those of Chadwick LJ in the Court of Appeal. If HMRC lose their appeal in the Sempra case prepare to revisit old repayment claims. It may well be that you can make a supplementary claim for additional sums of interest.

 

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Those of you who are overweight may have considered joining the Weight Watchers
programme but have probably not thought about the VAT implications!

Customers are asked to attend weekly meetings at which they are weighed. They are given an initial handbook, a monthly magazine and weekly leaflets. In 2004 Customs issued a ruling to Weight Watchers UK Ltd that part of the consideration paid by customers could be attributed to this zero rated printed material. In 2005 they withdrew this advice and ruled that the company was making a single supply of a standard rated weight loss programme and that it had to account for VAT on all the takings.

The company appealed and in March 2007 a VAT Tribunal allowed the appeal, holding that the company was making multiple supplies and that the consideration should be apportioned.

Whilst this is good news, it does illustrate one of the most difficult areas of VAT – when you bundle together goods or services with differing VAT rates, are you genuinely making multiple supplies at different rates or as HMRC will usually argue citing the case of Card Protection Plan, a single supply with the other items being merely ancillary or incidental to the main supply. We would be interested to hear of your own experiences in this area.

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H M Revenue & Customs have issued more guidance on the new declaration that is required to accompany all applications to use a special method for VAT partial exemption from 1 April 2007.

You are required to declare that to the best of your knowledge and belief the special method you are proposing “fairly and reasonably represents the extent to which goods and services are used or to be used in making taxable supplies”. A template for making the declaration has been given in HMRC Brief 23/07. See www.hmrc.gov.uk/briefs/vat/brief2307.htm

But what is fair and reasonable? If HMRC approves a method but subsequently decide that the method being used gives excessive input tax recovery they can override the method and retrospectively recalculate the affected VAT returns. Great care therefore needs to be taken by the person signing the declaration to satisfy himself that he is fully aware of the result the proposed method will have on all areas of the business and that it is “fair” to both the business and the Treasury. Call me cautious but I am not sure I would want to sign this. “Fairness” is a matter of opinion.

HMRC expect this to raise £20 million in 2007/08, so they clearly intend to challenge many of the methods proposed. Will the risk of a later challenge mean there will now be fewer applications?

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The European Commission is trying to standardise VAT invoices ( just invoices?) throughout Europe and the UK Government has agreed to make a number of changes to our regulations by August 2007.

The changes will affect:

• The numbering of invoices – they will need to be sequential based on one or more series which uniquely identify the document. Don’t we already do this?
• Cross border invoices to business customers in other Member States where the supply is exempt or where the customer applies the reverse charge procedure – the invoice will need to show the VAT treatment; and 
• Invoices issued under the margin scheme for second hand goods and the Tour Operators Margin Scheme- the invoices will need to identify the scheme used.

The Joint VAT Consultative Committee have asked for comments on the draft regulations and the estimated costs to business of making the changes. See www.hmrc.gov.uk/news under 14 March.
I suggest you read this before ordering any new stationery! 
 

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