VAT Newsletter January & February 2005

Welcome to VATease Newsletter for January/February. In this issue you will find articles on Business Start Ups, Demonstrator Cars, Pre Budget report and Customs Annual Report.

BUSINESS START-UPS GROWING IN UK

Small businesses are popping up more and more in the UK as official figures show the highest number of VAT registrations since records began. Last year saw the largest percentage increase in VAT registered companies since 1997, leaving the highest number of registrations since 1994. An 8.1% rise in the number of firms becoming VAT registered out-weighed the 6.4% increase in de-registrations. There are now around 1.8 million VAT registered companies in operation.

DEMONTRATOR CARS – VAT AVOIDANCE

Car dealers and motor traders should note new valuation rules covering supplies of demonstrator cars made to employees and relatives, has been brought into force with effect from 01 January 2005. Customs are now in a position to direct that the value of stock-in-trade motorcars made available by a dealer or manufacturer to an employee is taken to be its full market value. This is to counter VAT avoidance schemes operated by some car retailers and motor traders where only a nominal amount for the private use of demonstration cars was made and VAT accounted for on this heavily reduced value.

PRE- BUDGET REPORT

Legislation has been introduced to ensure fair VAT recovery on supply of shares. With effect from 03 December 2004, businesses will be prevented from unfairly recovering VAT on the cost of the services used to make an incidental financial supply (such as an issue or other supply of the shares)to a customer in the EU, by mixing these costs with costs relating to supplies for which VAT is recoverable. Businesses will now be required, in all cases, to apportion the VAT based on the use to which the costs are put. The costs include professional fees (legal fees, accountants fees etc). This rule applies irrespective of the terms of any partial exemption method that the business may operate.

The big question under the legislation is how a company is expected to go about apportioning an advisors fee between services used in connection with the exempt share issue and services used in connection with the other transactions. VAT information sheet 9/2004 issued by Customs states that “any calculation will be acceptable if it provides a fair and reasonable attribution of input tax according to the use, or intended use, of the relevant costs”. The examples then given are that the Company may be able to use any fee breakdown provided by the advisor as a basis of apportionment, or they will be able to ask advisor for two fee notes, or may be able to ask the advisor for sufficient information to make the apportionment!

PARTIAL EXEMPTION AND ROAD FUEL SCALE CHARGES

We have received written confirmation from Customs as to how the application of a partial exemption scheme effects how the road fuel scale charge is accounted for.

This is basically that as the fuel used is apportioned between taxable and exempt supplies, the actual scale output tax accounted for is similarly adjusted for and reduced by the calculated exempt percentage in each VAT return period.

VAT- INSURANCE

Customs have announced amendments to the law, which exempts insurance from VAT following the ECJ ruling in Card Protection Plan (2001). The revised law has come into effect from 01 January 2005.

The amendments to the law basically remove the restriction imposed on unauthorised insurers.

Although the VAT exemption is being amended to remove the requirement to be an authorised insurer, businesses in the UK that want to provide insurance must still generally be authorised and regulated by the Financial Services Authority. The requirement for authorisation is not changing. If Customs discovers any un-authorised businesses supplying insurance or re-insurance they emphasise that they have the ability to report the business to the FSA.

VAT- THE OPTION TO TAX

Customs have launched a 3-month consultation on the future of the option to tax. The consultation primarily seeks views on the conditions under which businesses will be able to revoke their option to tax.

The first options to tax will become eligible for revocation in August 2009. In order to take into account business practices and needs, the government is seeking the views and suggestions of property owners to assist in establishing the conditions under which written permission to revoke the option will be given.

UK-INTRASTAT

There will be no change to the intrastate thresholds from 01 January 2005. The assimilation threshold will remain at £221,000 and the delivery terms threshold at £14 million.

INVOICES IN FOREIGN CURRENCY

Customs are reminding all businesses that when issuing an invoice in a foreign currency, which includes UK VAT, the VAT amount must always be expressed as a sterling equivalent. This is a legal requirement and penalties may be levied on any businesses who fail to comply.

Any trader who receives a purchase invoice where UK VAT is charged but does not record the sterling equivalent is advised to contact their supplier as a matter of urgency and request a valid VAT invoice. Input tax claims may be denied if not supported by the proper evidence.

VAT-LIABILITY OF SUPPLIES OF HOT FOOD

Legislation came into force on 1 January 2005 amending the definition of “catering” for the purpose of defining the time of which the temperature of the food is relevant for deciding whether the supply is either zero-rated or taxable. The amended law confirms that the time at which the temperature of the food is relevant for determining whether it is hot food, is the time the food is provided to the customer rather than the time of the supply as determined under other provisions of the VAT Act 1994 (the most relevant of which for present purposes is the time at which the supplier receives payment).

The purpose of this new legislation is to remove any possible uncertainty and confirm that supplies of hot take-away food are standard rated irrespective of the timing of payment.

CUSTOMS ANNUAL REPORT

HM Customs and Excise have presented their annual report and accounts for the year ending 31 March 2004 (their 95th report). The report highlights the fall in VAT losses, from 15.8% to 12.9% closing the VAT gap by nearly 3% and providing an additional 1.7 billion pounds worth of revenue.

The VAT gap is the difference between the theoretical optimum yield for VAT (i.e. the amount that Customs estimate will be collected if all liable traders registered on time and then declared and paid all VAT due) and actual receipts.

During the first year of the Customs VAT Compliance Strategy net VAT receipts grew by £5.5 billion to more than £69 billion. Customs launched their VAT Compliance Strategy on 01 April 2003 to reduce VAT losses and help businesses to be compliant. The strategy is an integrated approach to encouraging voluntary compliance from business, and cracking down hard on those who abuse the system.

By the end of 2005/2006, Customs target is to reduce the gap in anticipated revenue and collected revenue to 12%.

DEFAULT SURCHARGE

A trader suffered a torn retina and an ulcerated cornea and had to undergo 4 laser treatments and 3 operations. He was off work for a total of more than 5 months, and was unable to do much paperwork for more than a year because of his poor eyesight. He telephoned Customs National Advice Service and offered to submit estimated returns but was told not to do so. He failed to submit 4 VAT returns and the Commissioners imposed default surcharges. He appealed.

The Tribunal allowed the traders appeal holding that prolonged illness would not by itself have constituted a reasonable excuse for the non-submission of the returns, but that in the circumstances the National Advice Service should have accepted his offer to submit estimated returns, and that there was therefore a reasonable excuse for the defaults. So much for Customs sympathetic approach!