UK: VAT Focus - A Round-up Of Recent VAT-related Developments, July 2007

Last Updated: 12 July 2007

Change to VAT invoicing Requirements

Following advice by the European Commission (EC) that several aspects of the EC Invoicing Directive have not been fully adopted in the UK, HM Revenue & Customs (HMRC) is introducing new regulations from 1 August 2007.

The most significant changes will be the requirement for invoices to be sequentially numbered (rather than to just bear an identifying number) and for additional information to be recorded on invoices issued in respect of cross-border EU supplies.

In cases of cross-border EU supplies, exempt supplies or where the customer is liable for payment of VAT, the invoice must show a reference to the applicable provision of the EC Directive that enables the supply to be zero rated or treated as a reverse charge. Alternatively, the relevant provision in UK legislation can be referenced (instead of the EC Directive).

The EC advises that certain exempt services, for which invoices are not currently required in the UK, will require invoices when supplied in the EU. However, HMRC has indicated that these changes may require further consultation and will not be introduced until after August.

What next?
Businesses in the UK will need to ensure that their accounting systems are updated in time for the new requirements. Businesses that are currently changing their systems should consider making provision for these changes now. If you have any concerns about how the proposed changes may affect your business, please discuss them with your Smith & Williamson VAT contact.

Partial exemption – annual Adjustment

Businesses that make exempt supplies are required to carry out partial exemption calculations each time they submit a VAT return. In addition, they are required to carry out a mandatory annual adjustment calculation at the end of their VAT year.

Unless otherwise agreed with HMRC, VAT years end on 31 March, 30 April or 31 May and the necessary adjustments have to be declared in the VAT return for the following quarter. For businesses with monthly VAT returns, the VAT year ends on 31 March. For many businesses therefore, the annual adjustment is due in the next few weeks.

If you are using the standard method, the annual adjustment is also the time to check that the results are fair and reasonable – if they are not, the ‘override’ provisions may come into play.

The annual adjustment calculation is especially important for those businesses required to make adjustments to VAT reclaimed on capital items.

What next?
If your business is required to carry out partial exemption calculations, you should consider making an annual adjustment following the end of your VAT year. This is also a good time to review the method and think about whether it is still producing reasonable results. If you require any assistance or any further information, please speak to your usual Smith & Williamson VAT contact.

VAT registration delays

Applications for VAT registration are currently subject to severe delays by HMRC. Some registrations are taking over six months to obtain and some more than 30 days to open. Even after applications are opened the delays can continue, with HMRC often asking for information that has already been provided or that should be obvious from the application. This is leading to cash flow issues for some smaller businesses and, in some cases, creating a lack of credibility with potential customers at a time when credibility is of paramount importance.

HMRC has said that these delays are the result of additional checks being carried out as part of its efforts to combat carousel fraud. To make matters worse, it has been announced that one of the most established HMRC offices dealing with VAT registrations, Newry VAT registration office, is closing. This will almost inevitably cause further delays in obtaining a VAT registration for the foreseeable future.

What next?
If you are intending to apply for a VAT registration, you should speak to your Smith & Williamson VAT contact to try and ensure that your application is not unnecessarily delayed by HMRC.

Fees paid on behalf of another party

The High Court and Tribunal have ruled in favour of HMRC against two premiership football clubs (Newcastle United and Birmingham City respectively). Both clubs recovered VAT incurred by them on fees charged by players’ agents. Although the clubs were responsible for paying the fees and the invoices were issued to the clubs, HMRC disallowed the VAT reclaimed on the basis that the agents’ services were not provided to the clubs but to the players they represented. Where the club was receiving a service from the agent, by representing both the player and the club (i.e. in the sale of a player to another club), partial VAT recovery was allowed.

It is important to note that these principles also apply to other common situations where one party agrees to pay fees on behalf of another party. For example, where due diligence is carried out by a bank in order to assess a potential loan to purchase a building, surveyors’ fees may be paid for by the lender. Any VAT charged by the surveyor will be irrecoverable by the lender because it relates to services provided to the bank.

What next?
If you have concerns about how you have dealt with similar situations, please speak to your usual Smith & Williamson VAT contact.

All-inclusive services

The Court of Sessions has upheld a VAT Tribunal decision that a ‘leisure card’ issued by a local council allowing the purchaser unlimited access to sports and leisure facilities should be standard rated. The council issued three types of card: a budget card, a pay-as-you-go card and an allinclusive card. The VAT treatment of the first two types of card was determined by the use of the cards between the standardrated and exempt activities. However, the VAT treatment of the all-inclusive card was decided on the terms of the contract, which simply provided a right to enjoy an undifferentiated range of facilities and activities; at the time of payment no part of the payment qualified for exemption. The whole consideration was therefore found to be standard rated.

What next?
If you have concerns about how you have treated similar services, please speak to your usual Smith & Williamson VAT contact.
[The Highland Council v HMRC [2007] CSIH 36]

Default surcharge – late payments

In the case of Kpack (UK) Ltd, the company was issued with a default surcharge as VAT due to HMRC was received after the due date for payment. Kpack submitted VAT returns and payment electronically, and had instructed its bank to pay the money due to HMRC a day before the extended deadline. Kpack believed that this constituted payment being made to HMRC on time. However, the Tribunal disagreed and confirmed that payment would only be treated as being made once the funds were actually received by HMRC. This is not as clearly stated on the electronic VAT return as it is on paper VAT returns.

As the appellant had submitted VAT returns in paper format previously, the Tribunal concluded that Kpack could not have genuinely believed that payment meant payment out of its own bank account rather than receipt of payment by HMRC. Therefore, the default surcharge was still applied.

What next?
All businesses should ensure that they have adequate procedures in place with their banks so that payments due to HMRC reach its bank account before the relevant deadline.
[Kpack (UK) Ltd v Revenue and Customs Commissioners (Decision 20109)]

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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