VAT Newsletter April 2005

Welcome to VATease Newsletter for April 2005. In this issue you will find articles on Input VAT on Share Issue Costs, Refund of Appeal Costs and the Merger of HM Customs & Excise with the Inland Revenue.

Input VAT on Costs related to share issues / floatations

There may be a major opportunity for any company that has incurred costs in relation to a share issue and/or floatation to recover input VAT that has previously been blocked by HM Customs & Excise. For more details see our plain-English guide on TaxationWeb at:

Anyone affected by this issue should contact a VATease consultant immediately to ensure prompt action is taken.

Budget Changes

A guide to the changes to VAT rules in the 2005 budget is available on our website at:

HM Revenue & Customs Update

A major review of the powers of the newborn HM Revenue and Customs department, (HMRC), is to be undertaken. The review will cover powers- existing and new, practices and procedures needed to meet targets and, consolidation of the different interest charges, penalties and rights of appeal.

We understand that redundancies of experienced officers continue to be made at Customs despite the intake of new less qualified staff and whilst Customs are pushing for visiting officers to take professional qualifications, sometimes nothing beats some good old practical experience.

Intrastat

There is no change to the intrastat threshold for calendar year 2005 - it remains at £221,000.

Chaotic business not dishonesty

HM Customs raised a S60 penalty (civil dishonesty) on a husband and wife partnership who had not declared a significant amount of sales, contending that the sales in question were of private assets.

However, the Tribunal found that although "run on chaotic and negligent lines" there was no proof of dishonesty.

Failure to submit VAT returns

Another poorly run company failed to submit a VAT return but instead paid the lesser assessment generated by HM Customs & Excise. VATease has always warned that, where this is done to deliberately deprive the govt. of money it can be treated as fraud with a penalty of up to 100% of the underpaid VAT. In this case Customs have not alleged deliberate dishonesty but still assessed a 15% penalty. The Tribunal agreed that this penalty could be assessed, although in this particular case there was mitigating circumstances and the Chairman directed it should be reduced by a half.

Single UK multiple supplies

Two cases have recently covered the relentless debate about whether a supply made up of more than one component is a single supply at one VAT rate or a multiple supply at different rates, (e.g. one of them was Telewest which debated whether the zero-rated magazine supplied to subscribers was a supply in its own right or whether it formed part of the standard-rated supply of television subscription services).

These cases only seem to reinforce the writer's opinion that any such debate has to be judged by each cases individual facts.

Mobile Phones

Once again we hear more rumours that, especially at large businesses, HM Customs & Excise are targeting the private use of mobile phones on which VAT is recovered in full. We understand that they have even gone so far as to identify numbers dialled after office hours and assumed that all calls to these numbers are private calls. They then proceed to raise assessments for output VAT chargeable to the phone's users.

Private Welfare Agencies

There was a change in the liability of welfare services provided by agencies who were required to be registered with the National Care Standards Commission about 2 years ago but some confusion as to when these rules should be applied. HM Customs & Excise have issued a business brief to clarify their policy of how the rules should be applied.

Incidentally, the brief includes the statement "Customs now accept that a welfare provider is not 'state-regulated' until its registration has been approved by the relevant national body for the regulation and/or inspection of care." VATease had advised its clients that this was the correct interpretation of the law despite firm statements from Customs to the contrary. Nice to see they've finally seen sense.

Legal professional privilege

Quite worrying is the result of a case which involved a golf club refusing to disclose information about a restructure it undertook to take advantage of the sporting services VAT exemption.

The club declined Customs request to disclose advice it had received from their advisers, claiming professional privilege. However, the tribunal chose to accept Customs argument that the legislation, which provides for the production of documents to Customs, should have a much broader interpretation.

Cross-border supplies of software

Anyone who's had to ship software across EU borders will know the complications it brings with it. Is it a supply of goods or a supply of services that happen to come with a physical medium? A recently started ECJ case, Levob Verzekeringen BV, OB Bank NV and others, should help to clarify the situation across the continent.

Hot Food

Back in August we reported the result of a Tribunal case in which it was confirmed that the sale of toasted sandwiches could be zero-rated because they were not toasted in order to be served warm but "to release the flavour of the ingredients and to make the bread crisp".

HM Customs & Excise have now released a business brief (9/2005) that clarifies their policy on when hot food can be zero-rated. It can be found at:

Transfer of a Going Concern ("ToGC")

The same business brief sets out HM Customs & Excise's view on how the ToGC rules are affected by the ECJ decision in the Zita Modes Sarl case over a year ago.

The ECJ ruled that the sale of a (or part of a) business can be a ToGC provided it is capable of independent operation and used by the purchaser to operate a business regardless of whether or not it is to be the same type of business.

Customs have decided that no change to UK legislation is require, despite the VAT Regulations containing the phrase "the assets are to be used by the transferee in carrying on the same kind of business". They may however change the guidance on how the legislation is interpreted.

Refund of Costs in Appeals Cases

The Tribunal appears to have drastically reduced the scope for reclaiming costs from HM Customs & Excise where a taxpayer challenges an incorrect decision or assessment. In the case FP Whifen the Chairman disallowed the costs of corresponding with Customs prior to the hearing restricting the claim to costs of preparation for and attending the hearing itself. The decision seems even more perverse when you consider that the original assessment from Customs was almost completely without merit flying, as it did, in the face of several previous Tribunal decisions.

This decision appears to remove any possibility of claiming costs for the work involved in contesting a VAT assessment no matter how poor its reasoning unless the case is taken all the way to Tribunal.

Outsourcing of work by insurance companies

Work done by businesses to which insurance companies outsource their back-office functions may become subject to VAT and therefore 17.5% more expensive to the insurance companies. The ECJ has recently ruled that these may no longer be treated as "intermediary services" and therefore not subject to the exemption for insurance.

Extreme law requires extreme measures

A sports hall funded by the lottery at a school in London has been pulled down in order to avoid a VAT bill of approximately £4 million!

The hall required extensive refurbishment, which would have incurred a VAT charge from the contractor doing the work. However, the building of a new one, which will be open to the community, will be VAT free.

Extreme Accounting

Ananova.com tells of a disturbing new sporting trend, extreme accounting. Following in the steps of the much reported extreme ironing, accountants are vying to out do each other by carrying out their work under the most extreme of conditions. There's even a website at: