If you have a UK VAT group registration which includes dormant or non-taxable persons eg passive holding companies, you should be aware that the UK is being asked to change its current rules which allow this.

Following a review by the European Commission of VAT groups around the European Union (EU), the UK and several other EU countries are being asked to amend their rules for VAT group membership.

The EC considers that by allowing non taxable members to be included in a VAT group, these countries have not correctly implemented EU legislation.

Many UK VAT groups will contain holding companies which are not making taxable supplies in their own right, eg management services. Instead these companies merely hold shares in their subsidiaries as an investment.

The removal of dormant companies should have little impact other than the administration time needed to apply for removal from the group. The effect on holding companies may be more significant, unless these entities can make taxable supplies in their own right and therefore remain eligible to be a member of the VAT group.

The UK has been given two months to correct this anomaly or it will face infraction proceedings and as such it is likely that any legislative changes could happen very quickly.

Therefore, businesses should urgently review existing VAT groups to consider the impact this change will have.

Jane Stacey is a VAT adviser and a senior manager at Mercer & Hole. The views given in this blog are personal to the author, if you would like to discuss the contents of this post with Jane you can call her on 01727 869141.

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The Enterprise Management Incentive (EMI) Share Option Plan has obtained State Aid approval from the European Commission (EC).

Apparently, the government has convinced the EC that the tax incentive on share options provided under EMI is important in enabling small firms to recruit and retain highly skilled employees.

As part of this there has been a change in the rules.  Currently, a qualifying company’s activities must be 'wholly or mainly' in the UK. Going forward, probably from next year, a company is only required to have a 'permanent establishment' in the UK. This change will enable companies based in the UK with considerable overseas activity to use EMI options.

The EC approval will last until 2018.

Currently low share prices and the widening of the eligibility criteria, is expected to encourage take-up amongst high growth firms.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author.

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The Government’s proposal to extend the Landlord’s Energy Saving Allowance to corporate landlords has recently been given formal State Aid approval by the European Commission.

The scheme provides incentives for landlords to improve the energy efficiency of their properties. From 8 July 2008 corporate landlords will be able to claim up to £1,500 a year per property against the cost of purchasing and installing energy-saving items such as floor insulation and draught proofing.

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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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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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Extended exemptions for certain medium-sized companies

With the accounting environment currently buzzing with talk of deregulation, the new Companies Act 2006 and lower compliance costs, the European Commission have also joined the band-wagon.
In their recently published documentation, the European Commission propose that companies who are…

•  owned by management (provided no other owners with >5%) or
•  unlimited liability companies

…follow the regime for small companies!

This deregulation in owner-managed enterprises, is quite similar to recent announcements relating to the Companies Act 2006. The similarities in business initiatives between the UK and Europe (and indeed Worldwide) is becoming more and more apparent.

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This blog follows on from my last post.

As companies move between SME accounting thresholds, the reporting structure and contents of financial statements changes.
Currently a small company that grows into a medium sized company will need to exceed the small company threshold for 2 consecutive years before it loses its small company exemptions. The same applies for a company diminishing in size.

A recent EU commission consultation paper is proposing that the limit is raised to 5 year for companies that are exceeding the threshold (ie for 5 years after becoming a medium sized entity a company can continue to utilise small companies exemption) and 1 year for a medium entity declining into a smaller entity.

These proposals will excite financial controllers and directors of smaller companies, who will anticipate keeping relatively simple accounts, with little disclosure, and lower compliance costs.

However the sword is double-edged. Investors and other financial institutions may not favour the change, which dilutes the market information (hence competitiveness) and dampens the scope for medium entity corporate transactions. Also there will be significant effect on other stakeholders, such as suppliers who often rely on financial information to assess customer credit worthiness.

This news will excite many, but the economic effect may well be harder to quantify.

For further details on this EU documentation follow the link below

European Commission:
http://ec.europa.eu/internal_market/company/simplification/index_en.htm  

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The European Commission have recently published some documentation that is aimed to significantly simplify the business environment that EU companies face. They revolve around reducing reporting and auditing requirements for SMEs, simplifying disclosure requirements, and convergence. My first blog of this series is relating to Micro-entities.

A potentially new category of business, a micro entity, is being proposed.

A member state could opt micro-entities out of domestic accounting frameworks and instead adopt a more simple framework. This would reduce the time and cost burden of complying with some relatively complicated accounting standards. But there are draw backs, as potential investors and banking organisations may view the new frameworks with some scepticism. As simpler frameworks, are likely to be user generated, reliability and comparability may suffer.

A ‘tentative’ definition of micro is likely to be…
•   <10 employees
•   <€500,000 Balance sheet total
•   <€1,000,000 Turnover

For further details on this EU documentation follow the link below

European Commission:
http://ec.europa.eu/internal_market/company/simplification/index_en.htm  

My next blog in this series will cover changes in SME thresholds and the associated ‘overlap’ periods.

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