VAT Newsletter July 2004

The Government is determined to cut down on the amount of Tax and VAT lost to aggressive tax planning schemes. Part of this crackdown is a requirement to disclose the use of such schemes to HM Customs & Excise. The legislation to implement this is still only in draft but is likely to make it to law.

Businesses with turnovers of up to £600,000 will have to notify Customs if they implement one of 10 prescribed schemes. Businesses with turnovers exceeding £10,000,000 will also be required to notify HM Customs & Excise if they undertake a transaction, or series of transactions, that have any of the "hallmarks of VAT avoidance".

Penalties for failure to notify will be 15% of the VAT saved for the listed schemes or a flat £5,000 for transactions with the hallmarks of VAT avoidance.

Once again proposed new legislation appears poorly thought out, hard to define and most likely to affect innocent parties who inadvertently undertake transactions that fall within Customs' definition of VAT avoidance.

The prescribed schemes include the sale and leaseback or purchase and lease in by an associated company of any non-property asset. This is a transaction that is frequently carried out for other commercial reasons and many businesses could inadvertently fail to register.

Many High Street shops are already operating a high profile VAT avoidance scheme whereby 2.5% of the amount you pay by credit card is a charge for the use of the card. This charge is exempt from VAT allowing the retailer to avoid declaring VAT on this proportion of its turnover.

HM Customs & Excise challenged Debenhams' implementation of this scheme and, as we reported in our June 2003 newsletter, won at Tribunal. This week it was announced the Debenhams have won their appeal at the High Court.

If this scheme were to be implemented by all large retailers it could cost the Treasury up to £2 Billion so you can bet there will be a change in legislation soon if Customs don't reverse this decision in a higher court. Customs have publicly stated their intention to appeal the decision and press for a change to EU legislation to prevent such schemes.

This scheme appears on the list of schemes mentioned above.

In two recent hearings the VAT Tribunal decreed that complicated structures set up for the sole purpose of producing VAT savings should be ignored.

In one (Capital One Developments) the Tribunal applied the ruling from the Halifax decision directing that certain artificial transactions should be ignored. In another (Kingfisher Plc) the Tribunal directed that a structure set up to reduce the VAT due on supplies of gift vouchers "amounted to an abuse of rights".

One of the quirky rules of VAT has always been the declaration of VAT on invoices where you allow prompt payment discount. Accepted understanding of the law has always been that VAT should be declared on the reduced amount regardless of whether your customer takes the discount or not.

This month, Customs have challenged this treatment in Tribunal and won. It remains to be seen whether this is a one off circumstance or if Customs have re-visited their interpretation of the legislation.

Further to our item last month, this month a Tribunal has allowed input VAT to be reclaimed on the purchase of cars provided to employees where the employees were specifically prohibited from using the cars for private use.

In another Tribunal hearing it was decided that a lap-dancing club was responsible for declaring VAT on the full amount received by the dancers from the customers and not just the 30% it received from the Dancers.

Despite spending in excess of £100 million on online systems, with an additional £577 million planned, there has been a disappointingly low take up of the e-VAT service. With a target of 50% take up of electronic services by 2006, less than 1% of businesses have moved away from paper based submissions a Public Accounts Committee report has said.

HM Customs & Excise appear to be cracking down on businesses that fail to submit EC Sales Lists. Recently they issued a penalty against a business that had posted the September 2002 List (due by February 2003) together with its November 2002 VAT Return. We remind you that no correspondence should be sent with the VAT Return, other than payment, as it is very rarely forwarded on to the appropriate section within HM Customs & Excise.

EC Sales Lists must be submitted by most businesses selling goods to businesses registered for VAT in other EU Member States.

A recent Tribunal ruling has confirmed that the replacement of single glazed windows in a listed building with double glazed windows of a similar style is "repair and maintenance" and not an "approved alteration". Consequently it does not qualify for zero-rating.

However, it was also recently decided that the installation of new wardrobes within a listed building (formed by the construction of a studded wall within the room) was an approved alteration and therefore zero-rated.

A business ran in to cash flow difficulties and, on 2 separate occasions, asked to be allowed to pay its VAT Return liability in instalments. The business subsequently received default surcharges for those periods.

The Tribunal accepted that HM Customs & Excise had not clearly stated that, even if the business complied with the terms of the Time To Pay agreement, a default surcharge would still be payable. The business therefore had a reasonable excuse and the surcharges were removed.

If you have found yourself in a similar situation please contact VATease immediately. It may be possible to have the surcharges lifted. However, it is expected that Customs will amend the wording on future Time To Pay agreements to avoid a repeat of this situation.

There has been a change to the Flat Rate Scheme for Post Officers and Couriers. With effect from 1 April 2004 couriers fall within the 9% bracket and Post Offices drop to 2%. Couriers already using the scheme can continue to use the 5.5% rate until 30 June 2004.