VAT Newsletter June 2005

Customs merge with the Inland Revenue

On 18 April 2005, Customs formerly merged with the Inland Revenue to become Her Majesty's Revenue and Customs (HMRC). It will be staffed by officers of Revenue and Customs (ORC's).

Perhaps that unfortunate acronym reflects how Customs are viewed. There seems to be a growing belief that Customs are bullying businesses to do as they are told.

That part of HMRC which corresponds to the old HMCE will continue to have its old powers, but no new powers borrowed from the old Inland Revenue, and vice versa. The new address of HMRC is 100 Parliament Street, London SW1A 2BQ.

VAT on postage

Postcomm, the UK postal regulator, is calling on the Government to add VAT to the price of stamps - an additional 5p for a 1st class stamp. It is currently discussing this matter with the Treasury and the DTI as it believes that the current treatment of the Royal Mail will have to be changed when the postal market is opened up to full competition next year.

Potential increase in the standard rate of VAT

The existing Governments manifesto does not mention the raising of the rate of VAT. It states " we renew our pledge not to extend VAT to food, children's clothes, books, newspapers and public transport fares". Surprisingly the last VAT rate rise ( from 15% to 17.5%) was in 1991 some fourteen years ago. Are we overdue for one? The General Election makes a change in the VAT rate more likely (as the Government is more likely to increase rates at the beginning rather than at the end of a term). Watch this space.

VAT avoidance/abuse of rights

As expected, the ECJ's Advocate General has suggested in his opinion in the Halifax case that a transaction cannot simply be disregarded if the sole motive is tax avoidance but that the doctrine of "abuse of rights" can be applied. The Advocate General said that if the following two objective elements are found the taxpayer should not be able to deduct input tax:-

1. If the intended aim of the relevant legal provision would be frustrated and
2. there is no other explanation for the transaction(s) apart from VAT avoidance.

Businesses should consider whether their operational structures are entered into for sound commercial reasons and not solely to avoid VAT.

Rover

It is understood Customs may be willing to be flexible with VAT due on supplies to Rover but, contrary to some reports, there will be no general relaxation of time limits. Those businesses who are finding it difficult to meet liabilities and have debts due from Rover can apply to Customs for a time to pay agreement.

It should be noted that, as normal, any supplier with outstanding debts will be able to claim bad debt relief after a period of 6 months; It may be possible therefore that those suppliers with time to pay agreements may be able to delay payment until they can claim bad debt relief.

Mobile Phones/Carousel Frauds/Update

Bond House, Optigen and Fulcrum.

In these three, conjoined cases, the ECJ was asked by the High Court for a preliminary ruling as to whether transactions, which form a part of a fraudulent scheme orchestrated by others, constituted economic activities within the meaning of Article 4 (2) of the Sixth VAT Directive. Customs argued that no transaction within such a fraud was an "economic activity" and was so to be removed from the scope of VAT. This had the effect of depriving the three appellant companies of some £38 million of input tax.
The Advocate General (AG) delivered his opinion and within its 43 paragraphs, he has comprehensively objected each of Customs arguments. Assuming that the ECJ does not materially dissent from the AG's opinion, then Customs will be faced with having to repay hundreds of millions of pounds of VAT withheld from traders caught in the same situation.

UK Tradecorp Limited

This is yet another case involving alleged carousel fraud and the refusal of Customs & Excise to repay the input tax to an innocent trader. In summary the VAT Tribunal decided the case in favour of Tradecorp after Customs failed to provide information, despite being directed to do so by the Tribunal. The Tribunal allowed the appeal, and noted "It is clear that sufficient resources were not devoted to this appeal. We sympathise with the individual officers and solicitors, however lack of resources is no excuse for the non-compliance; still less is it a "compelling reason". This decision emphasises the importance of complying with Tribunal directions or seeking extensions of times or variations by both the appellant and now more importantly Customs and Excise. Perhaps taxpayers can look forward to a quicker resolution of their appeal cases if Customs take note of this decision?

Nursing Homes

The Tribunal found that the home looked after its residents rather than treating them, as such it was a "home" and not a "hospital". Thus it was VAT free.

It is clear from the evidence and arguments that considerable effort was applied in this particular case, including non VAT cases looking at definitions of a hospital - not a case that was fought cheaply. Many a taxpayer would have baulked at such investment.

New/Revised Notices issued by Customs & Excise

Amended Notice 725/The Single Market.

This notice cancels and replaces Notice 725/(October 2002). It explains the way VAT is charged and accounted for on movements of goods within the EC Single Market, and how businesses should account for VAT on goods they buy from other EC countries (Member States).

Updated Notice 742/Land and Property (May 2005).

This Notice cancels and replaces Notice 742 (December 1995). This Notice explains when transactions involving land and buildings are exempt from VAT. It looks at what constitutes a supply of land and how to determine the liability of that supply.

These are two of the most voluminous Notices that Customs issue and will apply to most businesses.

A VAT decision involving a local (Selly Oak) Sub Post Office and Stores

In VAT Tribunal decision 19049, a couple purchased a retail shop, which included a sub Post Office. They were required to pay Post office Counters Ltd. £13,928, including VAT of £2,074. They reclaimed input tax on this payment. Customs not only rejected this claim but also imposed a misdeclaration penalty. The Tribunal held that the input tax was not deductible; however it allowed the appeal against the penalty holding that "their action in reclaiming the VAT was reasonable, although wrong".

VAT on costs relating to share issues (Kretztechnik)

In April we reported on a possible 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. A detailed explanation is available on our website at:

http://www.vatease.co.uk/news/vat-article-kretztechnik-ecj-case.htm

The European Court has now decided in favour of the taxpayer. HM Revenue & Customs will therefore be forced to repay VAT incurred on fees relating to share issues. Any one who has incurred such VAT within the last 3 years should contact VATease to discuss making an application to recover it.