With effect from the first VAT return starting on or after 1 August 2004, VAT
registered traders are required to notify HM Customs & Excise if they implement
"schemes" that Customs deem to be VAT Avoidance.
This can include transactions that aren't intended
to generate a VAT saving!
Requirements to Notify
There are 2 separate requirements to notify, one for "taxable persons" with
turnovers exceeding £600,000 and an additional one for taxable persons with
turnovers exceeding £10 million.
The requirement to notify for both tests occurs for each VAT return (or claim
such as a voluntary disclosure) that is affected by the use of a "scheme".
The turnover test applies to the 12 months prior to each VAT return and, using
the appropriate proportion of the limits, to the VAT return immediately
preceding each return, i.e. a person has turnover exceeding £600,000 if their
turnover has exceed £600,000 in the previous 12 months, £150,000 in the previous
3 months (for those on quarterly VAT returns) or £50,000 in the previous month
(for those on monthly returns).
"Taxable Persons" includes "group undertakings". The definition of "group
undertaking" is not a VAT Group but that in Companies Act 1985, section 259.
Each scheme need only be notified once, even if it produces ongoing results, but
multiple uses of the same scheme must each be separately notified.
Turnovers exceeding £600,000
Taxable persons with turnovers exceeding £600,000 must notify Customs if they
use any of 8 listed schemes, whether or not they create a VAT advantage. Full
descriptions, with examples, are available in Customs Public Notice (700/8) but
they are:
- 1) First grant of a major interest in a building
- Creating a zero-rated supply to recover VAT on renovation of houses.
- 2) Payment handling services
- Allocation of part of the payment for a retail supply to a supply of credit card
handling, as recently seen in the Debenhams appeal case.
- 3) Value Shifting
- Allocation of part of the payment for a retail supply to "linked goods" or
services that are zero-rated or exempt.
- 4) Leaseback agreement
- Any arrangement whereby a taxable person leases goods (excluding property) to a
connected person who is not entitled to recover VAT in full. This is a common
arrangement for pension funds and for financing purposes.
- 5) Extended approval period
- Any transactions where a retailer supplies goods on approval and does not
account for VAT until payment is received.
- 6) Groups: Third party suppliers
- Supplies made within a VAT group by a group member that passes the benefit of
such supplies to a third party.
- 7) Exempt education or vocational training by a non-profit making body
- Creating a non-profit making body to turn taxable supplies of education into
exempt supplies and removing profits through charges for supplies.
- 8) Taxable education or vocational training by a non-eligible body
- Creating a non-eligible body to turn exempt supplies of education into taxable
supplies and improve VAT recovery.
Turnovers exceeding £10 million
Taxable persons with turnovers exceeding £10 million, in addition to the above,
must notify Customs if:
- They are using a "scheme".
- One of the main purposes of the scheme is to obtain a tax advantage.
- The scheme contains one or more of the "hallmarks of avoidance"
- The scheme has not already been notified to Customs by the taxable person or
someone who has voluntarily notified the scheme (see below).
A "scheme" includes any arrangements, transactions or series of transactions.
The "hallmarks of avoidance" are:
- Sharing a tax advantage
- Tax savings are shared between the person to whom they accrue and another person
that is party to, or promotes, the scheme.
- Contingent fees
- A fee is payable by the user of the scheme to its promoter that is contingent
upon the tax saving generated by the scheme.
- Prepayments between connected persons
- Funding by share subscriptions or loans
- A scheme includes a supply of goods or services made between 2 connected persons
funded by a loan or subscription to shares or securities.
- Off-shore loops
- Insurance or financial services are made to persons outside of the EC
(generating entitlement to input VAT) that are then used to make supplies to
persons in the UK.
- Property transactions between connected persons.
A "tax advantage" is an increase in the input VAT claimable, a decrease in the
output VAT payable, a VAT claim made earlier than it otherwise would have been
or input VAT recovered before a supplier has to account for output VAT.
Schemes showing the hallmarks of avoidance can be voluntarily notified to
Customs by anybody. This would usually be done by businesses selling such
schemes so that their clients do not need to. Persons voluntarily notifying
schemes will receive a scheme number from Customs that should be provided to
the person using the scheme as proof that the scheme has been notified.
Penalties
Failure to notify Customs of the use of schemes will attract a penalty.
The penalty for failure to notify a listed scheme will be 15% of the VAT saved.
The failure to notify a scheme with the hallmarks of avoidance will be £5,000.
Despite there being a requirement to notify at each VAT return affected by the
scheme unless the scheme has previously been notified, Customs have stated that
there will only be a single £5,000 penalty.
Penalties can be removed or reduced if there is a reasonable excuse or
mitigating circumstances.
VATease comment:
It is clear that these measures will not greatly affect those against whom they
are targeted; the serial abusers of aggressive tax avoidance schemes.
These people will be sufficiently aware of the rules to ensure the correct
registration and will have double-checked their schemes to ensure they are robust.
VAT Avoidance schemes are, by definition, legal. Forced registration schemes
will do little to put off those who are intent on using them.
The measures are most likely to catch the unaware; companies entering into
commercial transactions that happen to fall within one of Customs definitions
of "VAT avoidance".
In the meantime, Customs have scored a spectacular own goal by publishing a
shopping list of workable VAT avoidance schemes complete with descriptions and
worked examples.
If you require further information please contact us on 0121 778 4299.
This newsletter is designed to keep readers abreast of
current developments. No liability is accepted for errors, omissions or opinions
it contains or for any reliance placed on this newsletter. This newsletter is intended
for general guidance only. No responsibility for loss occasioned to any person
acting or refraining from action as a result of any material in this publication
can be accepted by the authors or publishers. On any specific matter, reference
should be made to the appropriate advisor.
