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

Last Updated: 30 May 2009
Article by Martin Sharratt

2009 Budget summary

Some important VAT changes announced in the Chancellor's Budget are summarised below.

  • VAT registration turnover limit increased to £68,000, with the deregistration limit increased to £66,000.
  • The standard rate of VAT will return to 17.5% from 1 January 2010 (HM Revenue & Customs (HMRC) will also introduce anti-forestalling legislation).
  • Option to tax – the automatic permission conditions are being amended.
  • European Union (EU) VAT package – various measures that were announced previously will be introduced from 1 January 2010 onwards. This includes new place of supply rules, new time of supply rules, and a requirement to submit European Commission (EC) sales lists for services (and goods) supplied to businesses in other EU member states.
  • From 1 January 2010, EU 8th Directive claims for UK businesses will be dealt with by HMRC.

Further details can be found in the Smith & Williamson Budget booklet. If you would like a hard copy of the booklet please contact us, or visit our website to download the PDF http://www. publications

What next?

If any of the changes affect your business, or you would like to discuss any area in further detail, please get in touch with your usual Smith & Williamson contact.

New penalty regime reminder

HMRC has introduced a new penalty regime for all taxes which will affect VAT returns with a due date on, or after, 1 April 2009.

Penalties under the new system are 'behaviour based', the objective being to influence business behaviour and encourage improved compliance. The new system does not penalise businesses for errors made in VAT returns where 'reasonable care' is taken. However, 'careless' errors, where businesses have failed to take reasonable care, may be subject to penalties of up to 30%, with higher penalties applying if errors appear to be deliberate or hidden.

Exposure to penalties may be reduced if errors are disclosed to HMRC; the more businesses disclose, help and give access to HMRC, the more likely it is that potential penalties can be mitigated.

Errors may be corrected on subsequent VAT returns if the net errors are less than the greater of £10,000 and 1% of turnover shown in Box 6 of the return, up to a maximum of £50,000. However, if careless errors are corrected in this manner a separate disclosure to HMRC should still be considered, otherwise the error will be treated as undisclosed and could still expose the business to penalties.

What next?

We recommend that you review your VAT return preparation procedures to minimise the risk of future careless errors being made. In particular, we recommend you:

  • ensure your accounting systems are well controlled
  • maintain comprehensive VAT return records clearly supporting the VAT returns submitted to HMRC
  • retain any documentation you have
  • obtained in support of the VAT treatment applied obtain further advice from professional advisers where in doubt
  • prepare the return on a timely basis
  • perform credibility checks on the VAT return figures.

These checks should be documented to provide evidence that reasonable care has been taken. We can assist you with this and help you review and assess your processes. For further advice, please get in touch with your usual Smith & Williamson contact.

Partial exemption

Changes to the standard partial exemption method

HMRC has announced changes to the standard partial exemption method, which will take effect from 1 April 2009. Three of the four changes are optional, and will not require HMRC's approval if adopted. The fourth change is, however, compulsory. Please find below a summary of optional and compulsory changes.

Optional changes

  1. A business can now use its previous year's overhead VAT recovery percentage to determine the rate to use in the following tax year. This percentage would then be used in each VAT return for the year. An annual adjustment is done at the year end, using the figures for the full year as normal, with the resulting percentage used as the recovery rate for the following year.
  2. For tax years ending on or after 30 April 2009, businesses can now choose to include their annual adjustment in the last VAT return of the tax year, instead of the first VAT return following the end of the tax year.
  3. Newly partially exempt businesses can opt to recover their input tax on the basis of use (rather than turnover) in certain circumstances.

Compulsory change

4. Under the previous rules, the standard (turnover-based) method only dealt with input tax that was attributable to transactions within the UK; input tax relating to overseas transactions had to be recovered under a separate calculation or by adopting a special method. Going forward, the standard method will cover all of your residual input tax in a single calculation.

Annual adjustment reminder

Businesses that are required to carry out partial exemption calculations must carry out a mandatory annual adjustment calculation at the end of their VAT year.

Most 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 (subject to the new rules above). Therefore, for many businesses the annual adjustment is due in the next few weeks.

What next?

If your business is partially exempt, in addition to the annual adjustment requirements, you should consider whether it will be beneficial to adopt the standard method along with any of the optional changes, and how the compulsory change may affect you. If you would like to know more about the changes and how to implement them, please speak to your usual Smith & Williamson contact.

EU VAT refund claims reminder

If you are VAT registered in the UK, but have incurred VAT in other EU member states (where you are not VAT registered or required to be registered) you may be entitled to make a claim to recover the EU VAT through a procedure referred to as an EU 8th Directive claim. Refund claims for VAT incurred in other EU member states during the 2008 calendar year must be submitted to the relevant EU countries by 30 June 2009 – late claims will not be accepted. There are strict requirements in relation to the claim procedures and supporting evidence that must accompany the claim.

What next?

We have extensive experience of making these claims and have local associates in each of the EU countries who are able to assist. If you have incurred any business costs in other EU countries and have not already made a claim, please get in touch with 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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