VAT Newsflash - VAT Changes in the 2005 Budget

The Chancellor continues his attempts to close down VAT avoidance schemes whilst reducing regulation for small businesses.

Small Businesses

VAT Registration and Deregistration Limits

• Registration threshold raised to £60,000
• Deregistration threshold raised to £58,000
• With effect from 1 April 2005.

Reduction of Administrative Burden

• The Govt. is to work with the Chamber of Commerce to improve upon the 10% take up of the Flat Rate Scheme.
• HM Customs & Excise and the Inland Revenue are to consult on ways to reduce the administrative burden on small businesses. A link to the consultation document has been placed on our website at:
  http://www.vatease.co.uk/vat-small-business.htm
• The document is promising reforms including:
  • Single tax accounts, a single point of contact and "flexible payment options"
  • No inspections without a reason
  • Joint VAT and PAYE visits
  • Online registration, filing and payment including Direct Debit Payment
  • VAT Notices in CD Rom Format

General Provisions

Recovery of overdeclared VAT

• Changes have been made to the restrictions applied to the recovery of overpaid VAT.
• For technical reasons Unjust Enrichment could not be applied to assessment on periods that were net repayments to the taxpayer. This will be amended.
  • HM Customs & Excise can refuse to repay overdeclared VAT claimed back by a taxpayer where it would result in unjust enrichment (e.g. where the overpaid VAT should be repaid to the taxpayer's customers but is unlikely to be so).
• Changes have been made to the 3-year restriction on the reclaim of overpaid VAT. The date on which the 3-years will start from has changed to:
  • The end date of the VAT period in which the error was made;
  • The end date of the VAT period in which the incorrect Voluntary Disclosure was submitted;
  T
  • he end date of the VAT period in which the incorrect VAT Assessment was issued; or
  • The date of the overpayment where an overpayment was made to HM Customs & Excise.

Fuel Scale Charges

• Fuel scale charges have been increased this year.
• VAT due per quarter for a petrol car will now be £36.64 for a car under 1400cc, £46.32 for a car up to 2000cc and £68.06 for cars over 2000cc.
• Other figures available from VATease.
• Effective from the first VAT return starting on or after 1 May 2005.
• Fuel Scale Charge will in the future be tied to CO2 emissions rather than engine size.

Local Authorities

• Changes to the liability of childcare and welfare provided by Local Authorities will remove the restriction on input VAT currently suffered by LAs.

Energy Saving Materials

• Air source heat pumps and micro combined heat and power units are to be added to the list of materials eligible for the reduced rate of VAT (5%) when installed.

Charities

• Advice provided by charities in relation to the welfare of the elderly, disabled people or children will be subject to VAT at 5% where it is not already exempt from VAT.

Churches

• The Chancellor has extended for another 3 years, to April 2009, the grant to repay 100% of the VAT incurred on the renovation of Listed Places of Worship. He has also extended the scheme to include memorials. Further information will become available at http://www.lpwscheme.org.uk/.

Anti-Avoidance Changes

Disclosure Rules

• The scope of the requirement to disclose the use of VAT Avoidance Schemes has been extended.
• A "scheme" must be now be disclosed even the "tax advantage" it creates does not make a difference to the figures on the VAT return.
• Two new schemes are to be added to the list of schemes that must be disclosed by businesses with a turnover in excess of £600,000.
• Schemes that exploit the different treatment of vouchers by the UK and other EU Member States.
• Schemes that attempt to remove the effect of an Election to Waive Exemption (Option to Tax).
• A new "hallmark of avoidance" has been added for identifying schemes that must be disclosed by businesses with a turnover in excess of £10 Million.
• Schemes that make use of face value vouchers with low redemption rates
• VATease Comment
• Face value vouchers with low redemption rates are extremely common in retail promotions. Great care must be taken to declare the use of these where it creates a tax advantage if companies are to avoid the £5,000 fine.

Goods in Customs Warehouses

• Provisions are to be introduced to prevent a VAT avoidance scheme goods traded within a Customs Warehouse. Currently VAT is declared on the value of goods at importation when the goods are removed from the warehouse regardless of whether they have been traded at a higher value whilst inside the warehouse. This entitlement is likely to be removed for persons unable to recover VAT, such as unregistered businesses.

Partial Exemption

• Businesses who use the Standard Partial Exemption Method to apportion "non-attributable" (or "Pot") VAT in excess of £400,000 per month will no longer be able to round up the recovery to the nearest whole percent.
• Special Partial Exemption Methods must now be agreed in writing before they are used.
• There will be a slight extension to the circumstances under which HM Customs & Excise can apply the Special Method Override.
• A new requirement has been added to apportion types of input VAT that are not dealt with by existing Special Partial Exemption Methods in accordance with actual use.
• VATease Comment
• These measures will only affect partly exempt businesses. The first will affect only the largest businesses and the other 3 only those who have or are agreeing Special Partial Exemption Methods.

Place of supply of natural gas and electricity

• Following last year's budget the supply of natural gas and electricity became a reverse charge service. However legislation did not make it clear that the amount paid to an overseas supplier was to be treated as the net value of the supply (it could have been treated as a VAT inclusive amount even though it did not in-fact include VAT).
• The consideration payable to the supplier will now be the net value on which VAT is to be accounted for.