VATabox VAT Newsletter October 2007
In this issue look out for important changes and updates from HMRC.
VAT Registration - Change in Processing Offices
Important notice for all new and existing applicants -
As from 1 October the main processing office for VAT registration and deregistration applications will be Wolverhampton. This is also the address for any notifications of changes in details.
All applications for VAT68 (retention of VAT number following ToGC), VAT Group, Flat Rate Scheme and Annual Accounting will all be processed through the VAT Registration office in Grimsby however Agricultural Flat Rate Scheme applications need to be sent to Carmarthen.
Applicants without a tax representative, agent or business establishment in the UK still need to apply to the Non-Established Taxable Persons Unit in Aberdeen.
Online VAT applications can still be sent to the National Registration Service sites as usual and they will be distributed accordingly
REMINDER! Changes to keeping of VAT records - Transfer of Going Concern (ToGC)
We advised in our March issue that as from 1 September 2007 (NB. We actually told you 1 August! - Please disregard that error) changes have taken place to VAT record keeping requirements when a business is transferred as a going concern took place. Anyone who buys or sells a business as a transfer of a going concern will be affected
As from 1 September 2007 the records of a ToGC are retained by the vendor BUT..
Information must be available to the purchaser by the vendor in order that he can undertake his duties under the VAT Act.
Where permission is sought from HMRC for the purchaser to assume the vendor's VAT number, the vendor is still required to transfer the records to the purchaser unless the vendor needs to retain the records. In this case he must apply for permission from HMRC to keep them.
Information on the transferred business may be given to the purchaser by HMRC if it is deemed necessary for him to comply with his duties under the VAT Act.
The change in record keeping requirements for ToGC's brings the VAT rules into line with other regulatory regimes and was introduced as a response from businesses to simplify things.
VAT Invoicing - More Changes!!
This time the changes are for VAT invoicing. As from 1 October regulatory changes have been introduced by the government in order to bring domestic legislation in line with EU VAT law.
At the moment a VAT invoice needs to have an identifying number. This number will now have to be from a unique and sequential series. There are also new rules to clarify the VAT treatment when certain supplies are made.
Although these changes apply to everyone issuing VAT invoices, by and large it will make little difference to their invoicing procedures. Businesses most likely to be affected by the changes are:
Those using the margin scheme for second hand goods
Those involved in making travel related supplies that come within the scope of the Tour Operators Margin Scheme
Those involved in intra EC supplies of goods and services
Those making supplies where the customer accounts for the VAT (reverse charge)
This will include you if you are reading this from an accountancy practice with clients in other EC member states.
For 62.50 plus VAT, VATease can provide you with the relevant legislative references together with a list of clients this will directly affect. At the very least you will gain some kudos with clients by advising them of their responsibilities.
If you wish to take up this offer please let us know and we will action for you.
Help for Victims of Floods
A series of measures have been introduced by the government to assist businesses or individuals affected by the recent floods.
Legislation is being brought forward which will allow interest and surcharges on tax paid late as a result of the floods to be waived by the Commissioners. Effectively HMRC will be able to:
Defer collection of taxes and duties or agree payment plans
Waive interest, surcharges and penalties for the period concerned
Where records have become lost as a result of flooding, practical arrangements can be introduced
Defer compliance checks and investigations and
Suspend debt collection proceedings
Additionally if customers have missed deadlines as a result of flooding, as long as HMRC are satisfied that this is the case, no penalties will be charged.
If you or your clients are affected by the recent flooding and are having any difficulties in paying taxes, duties, sending in tax returns or other information it is vital that you contact HMRC as soon as possible on 0845 3000 157. The offices will be open from 8.00am to 8.00pm seven days a week.
VATease comment:
Obviously this is most helpful, however we have had a couple of calls to our office advising us that VAT officers are vehemently insisting that any destroyed records must be reconstructed at all costs.
If you receive such a demand the key thing is to consider whether HMRC's request is "reasonable", because this is the 'buzz word' within the relevant legislation.
Sales of Plots of Land with ability to connect to service utilities
Plots of land which had the facility to connect to service utilities were sold and the sales were treated as exempt. A ruling was then issued by Customs that the utility connections should have been charged as a separate supply at 17.5%. The partnership selling the plots appealed and the Tribunal allowed the appeal, saying there was just a single supply of land, which therefore qualified for exemption.
VATease Comment:
Yet more case law on the age old issue of whether something is a single supply at one VAT rate or a multiple supply at more than one VAT rate.
Back on the Carousel Again!
Input tax of more than 18 million in respect of purported transactions in mobile phones was reclaimed by two associated companies.The claims were rejected by Customs holding that the alleged transactions were in fact part of a carousel fraud. Upon appeal the evidence was reviewed in detail by the Tribunal. The appeals were summarily dismissed and it was concluded that the company's controlling director 'knew that the appellants were engaged in transactions whose purpose was the commission of a fraud on the Commissioners. The transactions between the two appellants had no true purpose other than to shift their respective VAT liabilities and repayment claims. Every one of the transactions had as its objective the defrauding of the Commissioners.'
VATease comment:
One of the first cases to be heard in this area but can be disregarded in cases where proper checks have been undertaken.
'Lennartz Accounting' Regulations'
For anyone who may be unaware 'Lennartz Accounting' is when a business allocates an asset just for business purposes and recovers all VAT charged up front and then accounts for VAT on the non-business use in each VAT return period.
The Government has announced that Lennartz Accounting Regulations will now be implemented on 1 November 2007 instead of 1 September in order that they can take into consideration comments that have been made. It has however been confirmed that the "economic life" of land and buildings will be 10 years for making any adjustments for non business use.
More Misery after the Midlands Floods
Another feature of the flooding disaster earlier this year is that of accounting records and invoices being destroyed beyond recognition.
As a result of this very problem a couple running a hotel in Shropshire had all of their records lost in the floods. These included invoices pertaining to an extension that was built onto the hotel and which cost in the region of 100,000. The assessing officer had been made aware of this dilemma and therefore drew up a list of invoices from working papers produced by the company accountant. Queries were found on the list and it was left with the accountant for verification. Naturally some names could be verified but equally others couldn't be established so neither could a valid VAT registration. In these cases claims for input tax could not be allowed.
The argument was made that there had never in 20 years of trading, been any missed tax or VAT payments and there had never been any errors on their returns but this was not in dispute. Unfortunately as some of the contractors and tradesmen who worked on the extension had either gone out of business or could not be located, it was not possible then to produce copy documents so input tax could not be claimed.
It was finally concluded that the Commissioners were reasonable in their assessment as they had allowed input tax wherever possible and had in fact reduced it from their original assessment. This left approximately 5,000 due to be paid to the Commissioners.
VATease comment:
In light of recent catastrophes lessons need to be learnt and it would therefore seem to be more prudent to ensure that all important documents be kept securely above potential water level rates and maybe also in fire proof boxes. Whilst these measures may seem extreme they can ultimately save a lot of distress and unnecessary pressures.
Driving You Round the Bend?
The sole proprietor of a driving school appealed against a decision of the Commissioners to treat driving tuition fees as standard rated. The appeal concerned the common issue of whether the tuition was supplied as agent or principal and the issue of private tuition.
It was argued that the proprietor's role in the business was more that of an agent as the driving instructors were running their own businesses as principals. He provided dual control cars complete with signage and insurance. Drivers were supplied with pupils through the advertising of the driving school in Yellow Pages and booking facilities were also provided. Subsequent pupil bookings were usually made directly with the instructor concerned. A fixed fee was paid by the instructors for these services and they were all responsible for their own records.
The appeal failed on this point because it was found that the instructors were supplying their services on behalf of the proprietor as principal.
An instructor was sent to a school to give tuition as an extra curricular activity. To qualify for educational exemption, the supply of private tuition must be in a subject ordinarily taught in a school or university. It was found that an extra curricular activity for children in driving tuition was not a subject ordinarily taught in a school or university and therefore standard rated.
Be Warned!
Always take steps to ensure that businesses you deal with are VAT registered in their own respective countries or risk getting your fingers burned. (Dennison Commercials Limited V20334)
A company selling commercial vehicles from Northern Ireland, sold lorries to a customer in the Republic of Ireland. Transactions had been carried out over a number of years between the two companies and the client's Republic of Ireland VAT registration number had been used by the seller to meet one of the conditions for zero-rating. At the customer's request, the vehicles were all pre registered in Northern Ireland in advance of the dates on the sales invoices and the customer then subsequently collected them. Unfortunately, as is so often the case, the company that sold the vehicles had failed to check the validity of the ROI VAT number and it was concluded by HMRC that they were not entitled to zero rate the sales as the VAT number used by the customer was actually invalid.
Because of a failure to check the validity of a VAT registration number, the company ended up with an assessment of 34,627 - a very expensive lesson!
VATease comment:
The following website can be used to confirm validation of VAT registration numbers; http://ec.europa.eu/taxation_customs/vies/vieshome.do - it may be a good idea to advise clients to put it into their "favourites".
Flat Rate Scheme - Don't Get into Bed with your Neighbour!
An exercise club applied to join the flat rate scheme in January 2005. However, it was contended by the Commissioners that this exercise club was closely associated with it's 'landlord' and therefore withdrew the club from the scheme from the date of it's admission, resulting in recalculation of the VAT Returns and more VAT to pay.
You are excluded from the flat rate scheme if you become associated with another person who has a dominant influence over the business.
It was found that dominant influence existed because the 'landlord' had subsidised the exercise club's activities by not collecting rent and leasing charges. It also provided direct debit and credit card facilities and overall the two companies shared close economic links. Furthermore the exercise club was able to stay in business by the support of the 'landlord' as they assumed responsibility for the upkeep of the gym and the equipment used. This in turn allowed the 'landlord' to avoid maintenance costs.
VATease comment:
When a client joins the flat rate scheme make sure you remind them there are exclusions that can prevent them from joining and that Customs can withdraw the flat rate scheme retrospectively thus making them liable for VAT from the date of admission to the scheme.
A Pitch is a Pitch is a Pitch
The owner of a leisure company provided caravan pitches for a 12 month period which he treated as standard rated. However he reached the opinion that because the underlying liability of land is VAT exempt, he should claim a refund of the VAT he had paid. But because a restriction arose through planning control which meant occupation could not take place during the month of February, it was found that this made the pitches seasonal and hence standard rated.
VATease comment:
Remember to read the small print!
Welcome to the Union
Cyprus along with nine eastern bloc countries joined the EU in 2004 and two more joined in January this year. Upon joining the EU travellers from these countries no longer pay UK tax or duty on excise goods bought as this has already been paid in their own country. However special rules exist for cigarettes and other tobacco products bought from some EU countries.
Limits on the amounts of cigarettes and some tobacco products travellers are able to bring into the UK for own use without paying duty, are being maintained by the UK.
They are:-
Estonia - 200 cigarettes or 250g tobacco
Bulgaria, Czech Republic, Hungary, Latvia, Lithuania, Poland, Romania and Slovakia - 200 cigarettes.
UK duty must be paid by anyone carrying over the limit otherwise they risk having all their tobacco products seized by Customs and Excise.
Hair Raising Experience?
The saga continues in respect of hairdressing chair rentals!
Two recent cases have taken place; one was won - with the result that the rental received was VAT exempt. The other lost with the result VAT was payable.
Because the results of cases such as this depend wholly on the facts may we suggest if you have clients that are affected, please follow the links which give the full facts surrounding the case.
Disbursements
After a VAT inspection it was found that a solicitor had made some accounting errors. Upon further inspection of his records it was also found that he failed to account for VAT for supplies of legal services. The solicitor argued that the fees he charged for telegraphic transfers and Land Registry documents were disbursements. The Commissioners however disagreed finding that transfers and documents form part of the supplies of legal services and not disbursements.
For further information the conditions for disbursements are as follows:
You acted as the agent of your client when you paid the third party
Your client actually received and used the goods or services provided by the third party
Your client was responsible for paying the third party
Your client authorised you to make the payment on their behalf
Your client knew that the goods or services you paid for would be provided by a third party
Your outlay will be separately itemised when you invoice your client
You recover only the exact amount which you paid to the third party and the goods or services which you paid for are clearly additional to the supplies which you make to you client on your own account.
VATease comment:
These conditions are quite clear and the Commissioners will not be persuaded otherwise, it would therefore be prudent to ensure that they are adhered to if assessments by the Commissioners are to be avoided.
Hard Drive on your Hard Drive
In the past when a computer was provided for any employee at home, full VAT recovery was allowed provided some business use was made. However with immediate effect this policy has been revised.
To determine the amount of VAT that can be claimed a business must now be able to demonstrate why the employee is being provided with a computer for use at home. If the use of the computer is primarily for the employee to carry out work related to his employment then full VAT can be recovered without any requirement to account for VAT on private use. If it cannot be shown that the provision of a computer was necessary for employment duties to be carried out, then only a portion of VAT incurred is recoverable as input tax. It may also be possible to have a set percentage agreed with HMRC based on a representative period.
For those businesses that are still under an existing Home Computer Initiative agreement full VAT recovery can continue until the expiry of same.
Is Murder a Reasonable Excuse?
The following case debated whether a "reasonable excuse" could be found for the disapplication of the three year cap.
A young 24 year old was assisted by his father in purchasing an Optometrist practice and VAT accounting was based on the previous owners system. The business was successfully built up, but two years after the purchase, an ex-employee shot and subsequently murdered the owner. This tragedy resulted in a thriving business with reliable and experienced staff but without an owner. Because of this, the 'father' decided to keep the business running under the guidance of existing staff and went in on a weekly basis to ensure it's smooth running.
Unfortunately one of the things that 'slipped' in this period was the correct submission of the VAT returns and in 2006 Customs and Excise were asked to review the "capping" decision in order that VAT previously underclaimed could be recovered, but this was rejected as it was deemed that there could not be a 'reasonable excuse' for taxpayers not knowing about it's introduction, regardless of how tragic the circumstances.
VATease comment:
While it would seem a harsh decision on the part of HMRC, these regulations are in place to provide a fair system for all concerned and if the three- year cap was extended to say four years, there would still be situations whereby a request would be made for the time limit to be extended. The line unfortunately has to be drawn somewhere.And finally
We hope that you have all had enjoyable holidays and are now fully refreshed and getting into the mood for the next big break - Christmas!
Don't forget it's only 76 days to go!!
Our next edition will be Decemeber.
If you require further information please contact us on 0121 778 4299.
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