UK: VAT Focus – A Round - Up Of Recent VAT - Related Developments

Last Updated: 1 October 2008
Article by Martin Sharratt

Changes to VAT services in Ireland Smith & Williamson recently merged with the Irish firm of accountants and tax advisers, Oliver Freaney & Company. As a result, we have enhanced our expertise in Irish tax and VAT issues.

In this issue, we outline some potential Irish VAT issues – with a focus on property-related matters – for UK businesses.

Irish property transactions

Transactions in Irish property (acquisitions, sales, leases, etc) are generally subject to Irish VAT, regardless of where the individuals entering into the property transaction are based.

A radical new regime affecting VAT on Irish property was introduced in Ireland on 1 July 2008. The new rules are summarised below.

  • Sales or ownership leases of 'new' commercial property are subject to Irish VAT at 13.5%.
  • Sales or ownership leases of 'old' commercial property are exempt from Irish VAT, with an option to tax, which must be exercised jointly by the seller and purchaser.
  • Grant of non-ownership lease is exempt, with the option to tax rents at 21%, which can be exercised unilaterally by the lessor.
  • Introduction of the Capital Goods Scheme for regulating the deductibility of VAT over the life of a building.

If you are considering entering into any transactions in relation to Irish property, you should seek local VAT advice before proceeding.

Services connected to Irish property

Where a UK business provides services connected to Irish immovable property, e.g. building services, architectural services and services of estate agents, the UK business may be required to register and account for Irish VAT on the supply of these services. This general rule applies even where the UK business is not established in Ireland.

VAT and relevant contracts tax

From 1 September 2008, a UK building contractor who engages a sub-contractor to carry out construction operations in Ireland may be required to self-account for the Irish VAT arising on the supply of services by the sub-contractor.

What next?

If your business has operations in Ireland, supplies goods or services to Irish customers, or has dealings in Irish property, it may be advisable to review your Irish VAT operations in light of the new rules. Please get in touch with your Smith & Williamson contact for further details.

Extension of VAT exemption to special investment funds

With effect from 1 October 2008, the VAT exemption for managing 'special investment funds', which used to apply to UK Authorised Unit Trusts (AUTs) and open-ended investment companies (OEICs) only, will be extended to cover a number of other funds regarded by HM Revenue & Customs (HMRC) as similar. These include certain foreign equivalents of those funds, such as Dublin-based OEICs and other collective investment undertakings, for example Venture Capital Trusts. These new rules also have an impact on the related VAT recovery on costs incurred, although the recovery rules themselves have not changed. Currently, where a fund is located outside the UK and the fund management is provided without charging VAT, the related input tax may be recovered on the basis that the service would have been taxable had it been performed in the UK. However, this may no longer be possible in the future, leaving the fund manager in a worse position with irrecoverable VAT on costs.

We understand that there are ongoing discussions on the practical aspects of applying this exemption, and HMRC may issue further clarification in due course.

Further litigation has now been started, to establish whether the investment management of pension funds should also be VAT exempt. However, it is likely to be some years before this is finally resolved.

What next?

Investment fund managers should establish whether any of their managed funds might qualify as 'special investment funds', and review their approach to both the charging and recovery of VAT on costs. Claims can also be made for certain periods in the past, so if you would like to discuss your VAT position, or for further information on these latest developments, please speak to your Smith & Williamson VAT contact.

New voluntary disclosure rules

The 2008 Budget announced a welcome increase to the £2,000 limit below which VAT errors may be corrected on a subsequent VAT return.

Under the 'old' rules, if a business discovered VAT errors resulting in a net error of over £2,000, the errors had to be notified to HMRC and could not be adjusted on the next VAT return, regardless of whether the error is in the business's favour.

From the relevant start date, errors identified in earlier VAT returns may be corrected on the next VAT return if the net value of all errors is less than £10,000. For larger businesses with a turnover in excess of £1m, errors totalling more than £10,000 may also be corrected on the next VAT return, with the disclosure limit increased to 1% of turnover up to a maximum of £50,000.

The new rules apply to errors identified on or after 1 July, 1 August or 1 September 2008, depending on the VAT return periods applicable to the business.

Previously, HMRC did not apply misdeclaration penalties for errors that were voluntarily disclosed, however, interest may have been applied to any amounts owing to HMRC.

Under the new penalty regime, which will apply to all VAT returns with a filing date on, or after, 1 April 2009, error corrections (previously known as voluntary disclosures) will no longer prevent HMRC from applying misdeclaration penalties. Errors corrected on VAT returns, rather than being disclosed to HMRC, may even attract higher penalties under the new regime.

Where a disclosure is required, full details of each error must be provided to HMRC, including the amount of the error and when and how it arose.

What next?

Despite increasing the limits for correcting VAT errors on the next VAT return, professional advice should be obtained once errors are discovered so that any penalty and default interest implications can be considered. You should get in touch with your Smith & Williamson contact if this affects your business.

Zero rating – regular Pringles are not made from potato

The High Court recently released its decision regarding the VAT liability of regular Pringles, referred to as a savoury snack.

Previously, a Tribunal had decided that regular Pringles were subject to VAT on the basis that they were a 'potato crisp product' made from potato. However, the manufacturer argued that the product should qualify for zero rating and appealed to the High Court.

The manufacturer argued that regular Pringles were not similar to potato crisps on the grounds that they have a shape and uniform colouring different to the potato crisp, and unique packaging in a tube. In addition, Pringles contain part potato and part non-potato flours, unlike other crisps which have up to 60-70% potato content.

The High Court ruled that Pringles were not 'made from the potato', as set out in the VAT legislation. To be subject to VAT a product 'must be wholly, or substantially wholly, made from the potato'. The High Court found that Pringles did not meet these criteria, as the Pringles were made from a variety of ingredients which only had a potato content of about 42%, which did not qualify as wholly or substantially made from the potato. Therefore the product could be zero rated. We understand that the decision has been appealed by HMRC.

What next?

This case demonstrates the difficulties in applying the correct VAT treatment to various different food and beverage products. If you manufacture, purchase or sell any food or beverage products, you should consider reviewing the VAT treatment applied. If this affects your business, please speak to your 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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