UK: VAT Focus - February 2012

Last Updated: 9 February 2012
Article by Smith & Williamson

Compound Interest Update

The Advocate General (AG) has recently given his opinion in the Littlewoods Retail case at the Court of Justice of the European Union (CJEU). The AG has indicated there is no basis under European law for compound interest reimbursement but did suggest that when national courts consider how their laws governing this should be interpreted, they should be no more or less favourable than in the case of refunds of other taxes (such as UK direct taxes). There may still be some scope to suggest that compound interest can apply in the UK if any other tax refunds can qualify for compound interest. Many taxpayers had argued that repayments for overpaid VAT, some of which date back to the beginning of the VAT system in 1973, should be subject to compound interest until the date of repayment by HMRC.

What next?

The AG's opinion is not always followed by the Court, and it remains to be seen whether the Court will do so in this case. If it does, this could provide a welcome relief for the Treasury, but may not be the end of the matter; with billions at stake, the appellants may be e xpected to continue their campaign until every line of argument has been exhausted.

VAT on postal charges

Many charities, not-for-profit organisations and businesses in the VAT-exempt sectors will be affected by the introduction of VAT on a number of Royal Mail parcel services from 2 April this year.

Some postal services, including stamped or franked first and second class letter post, will remain exempt from VAT as they are provided under the Royal Mail's Universal Service Obligation. Other postal services subject to regulatory price control will also remain VAT exempt.

However, VAT will be charged from 2 April 2012 on:

  • business collections
  • Special Delivery " Next Day (on account only)
  • door to door.

A full list of the postal services that will now be subject to VAT can be found on the Royal Mail website. The addition of 20% VAT on postal services will be a significant cost increase for organisations and businesses that cannot reclaim all of their VAT and an incentive to find more tax-efficient ways to communicate with their customers. For those that are partly exempt and able to reclaim a proportion of their VAT costs, it may be an opportune time to review their VAT recovery calculations to try to mitigate the irrecoverable VAT costs.

What now?

Charities and other organisations that are not VAT registered, should ensure that they are taking advantage of other measures to minimise the VAT cost of postal campaigns, such as the zero-rating of campaign packs where individual elements might otherwise attract VAT.

Even if you are normally able to reclaim your VAT costs, the changes in April might still involve a bottom-line cost for your business. If you use a franking machine, Royal Mail has said that the services on which VAT will be charged from April can only be purchased through 'smart' franking machines, which will also produce VAT invoices; the VATable services cannot be purchased through older franking machines.

HMRC compliance changes 2012

HMRC has confirmed a number of VAT compliance changes that will come into effect in 2012.


Businesses involved in the buying and selling of goods with other VAT registered businesses in the EU will be interested to know that current Intrastat legislation will be amended to:

  • make online filing compulsory (including the submission of amendments, corrections and additional declarations)
  • bring forward the monthly due date for submission of Intrastat declarations, from the last day to the 21st day of the month following the reference period for the declaration (e.g. declarations for the reporting period ending 31 March 2012 will be due for submission on 21 April 2012).

Both changes will take effect from 1 April 2012.

EC sales lists

Businesses selling goods to other VAT registered businesses in the EU must submit EC sales lists (ESLs).

From 1 January 2012, businesses with EU sales of goods exceeding £35,000 in the current or previous four quarters are required to submit ESLs monthly. Below this level, they may continue to submit ESLs quarterly.

Businesses that supply services subject to the reverse charge in the customer's EU member state will be unaffected by this change and may submit ESLs monthly or quarterly, regardless of sales value.

Overseas businesses trading in the UK

The VAT registration threshold will be removed for non-UK established businesses trading in the UK with effect from 1 December 2012. A non-UK established business that makes taxable supplies of goods or services in the UK will be required to register for VAT in the UK, regardless of their value.

Moving to VAT online

Online submission of VAT returns will become mandatory for all businesses, with effect from 1 April 2012.

An enhanced version of HMRC online services will be available from October 2012. In addition to VAT registration applications, the enhanced online service will also allow registrations to be cancelled.

What now?

If you are affected by any of these changes, please speak to the VAT team or your usual Smith & Williamson contact for more information.

Lebara phone cards

The AG has issued his opinion in the case of Lebara which concerned the supplies of phone cards. Lebara sold phone cards to distributors in other EU member states who sold them on to end users in the respective member states. The end users' use of phone time via the card was ultimately routed through Lebara's UK-located telephone exchange.

HMRC argued that Lebara made two supplies.The first supply was made to the distributors and the second supply was to the end users (which was taxable in the UK).As a result of recent case law, HMRC considered that it had a choice as to which supply to tax.

The AG suggested two answers, both concluding that Lebara makes a taxable supply to the distributors, meaning there would be no UK VAT due on the supplies (as HMRC had contended). The suggestions were:

  • Lebara makes a supply to the end user of the phone card via the distributor, but if the distributor acts in his own name in the onward supply of Lebara's phone services to the end user, the distributor is making the supply to the end user; or
  • Lebara makes a single supply to the distributor, and the subsequent purchase by the end user does not represent a supply by Lebara.

What now?

This could form a major issue for HMRC as, if the AG's opinion is followed, it casts doubt on the way in which the UK treats supplies of vouchers and similar supply chains. We will have to wait and see how HMRC responds once the Court has confirmed its decision, but, in the meantime if this concerns your business please get in touch with your usual Smith & Williamson contact for further information.

Transfer of a going concern and the grant of a lease

In a recent CJEU case, Ms Schriever ran a shop selling sports equipment from premises that she owned. In June 1996, she sold the stock and fittings of the business to a sports retailer. A lease was granted to the sports company for an indefinite period but this could be terminated by either party at short notice and was to take effect at the end of the following calendar quarter. VAT was not charged on the sale of the stock and fittings as Ms Schriever treated the sale as a transfer of a going concern (TOGC).

The German tax authority disagreed with this VAT treatment because the premises had not been transferred along with the stock and fittings.

The Court held that it was not necessary for the premises to be transferred with the assets as long as business premises were made available by a lease or the transferee had its own premises from where to carry on the business. The fact that the lease could be terminated at short notice did not affect the TOGC treatment.

What next?

This is an interesting development in determining what can qualify as a TOGC. However, many commentators have concluded that the creation of a new lease can constitute a TOGC in itself, in our view this is not apparent from the decision and care should be taken in any TOGC transactions. If you would like any further advice please contact your usual Smith & Williamson contact.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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