UK: Weekly Tax Briefing

Last Updated: 13 June 2000

Proposed EU Changes To VAT On Online Digital Products

The European Commission has presented a proposal for a Directive to modify the VAT treatment of services supplied by electronic means (ie, online digital products such as downloaded music and software), together with subscription-based and pay-per-view radio and television broadcasting.

The proposal is designed to prevent the distortion of competition caused by current VAT rules.

Under the proposal, when electronic services are supplied for consumption within the EU they will be subject to EU VAT. The 'reverse charge' will apply for business to business transactions between businesses in different EU Member States, as well as to supplies from non-EU suppliers to businesses within the EU. Supplies by a business in one Member State to a private consumer in another will be subject to VAT in the supplier's Member State.

When electronic services are supplied for consumption outside the EU they will not be subject to VAT. Non-EU businesses will have to register for VAT if their annual sales to private consumers within the EU exceed 100,000 Euros. Registration will only be required in a single Member State - probably the first Member State where supplies to private consumers are made.

Non-EU suppliers are likely to prefer to register in countries with the lowest standard rates of VAT, (rates range from 15% to 25%), and the simplest compliance régimes.

Businesses may be concerned that it is by no means clear how the requirement for non-EU suppliers to register for VAT in the EU will be enforced. Checking the VAT registration status of customers to establish who is responsible for accounting for VAT may also result in difficulties for businesses.

Assuming the proposal is accepted, Member States face a tight timescale as they will be required to introduce legislation before 1 January 2001.

Order of set-off of ACT

The Court of Appeal has recently found for the taxpayers in two cases (heard together) which concerned the order of set-off of ACT against corporation tax liabilities.

In Carr v Armpledge Ltd; Carr v Fielden and Ashworth Ltd the taxpayer companies had made claims to carry back surplus ACT from one accounting period, and subsequently made similar claims in respect of the immediately preceding accounting period.

The companies maintained that effect should be given to these two claims in the order in which they were made; ie, that ACT of the later period should be utilised first, and then that of the earlier period.

Thus a claim made by Armpledge on 11 May 1995 to carry back surplus ACT arising in the year to 31 December 1994 would be given effect in priority to a claim made one day later to carry back surplus ACT arising in the year to 31 December 1993.

The Inland Revenue maintained that the ACT of the earlier period should be used first, irrespective of the order in which the claims were made. Thus, effect must first be given to the claim to carry back surplus ACT arising in the year to 31 December 1993 even though that claim was made after the claim to carry back the surplus of the following year.

The point was of significance because if the 1993 liability was carried back first it used up the corporation tax liability available for offset (the 'ACT capacity') for the years 1991 and 1990, and part of that for 1989. The 1994 ACT could then be set against the remaining corporation tax liability of 1989 and the liability for 1988, with the balance being carried forward. It could not, however, be set against the ACT capacity in 1987 as that was beyond the six year time limit.

If, by contrast, effect was given to the 1994 claim first, it would have used up all the ACT capacity back to 1989 and part of that for 1988. The 1993 ACT would then have been set against the remainder of the 1988 capacity and been available to set against the capacity of 1987, with repayments being made accordingly.

The Special Commissioners held in favour of the taxpayers, and the High Court in favour of the Inland Revenue.

The Court of Appeal found for the taxpayer companies on the basis that the order of set-off of different claims was not addressed in the legislation. It therefore followed that the taxpayer was entitled to give effect to them in the order in which they were made, as there was no clear statutory language denying them that relief.

It remains to be seen whether, in view of the abolition of ACT, the Inland Revenue seeks to take the case to the House of Lords.

Consultation on simplifying employers' national insurance contribution rules

The Inland Revenue has issued a discussion document containing proposals to simplify the rules for employers administering national insurance contributions. They are intended to give employers:

  • a clearer view of Inland Revenue officers' powers to inspect employer records;
  • a simpler system for calculating NICs on payments to UK employees seconded abroad;
  • a common basis of 'pay' for tax and NICs, except where the law provides otherwise;
  • a simpler procedure for dealing with arrears of NIC;
  • more time to deal with irregular payments of earnings.

The discussion paper 'Simplifying national insurance contributions for employers' is available on the Inland Revenue website at www.inlandrevenue.gov.uk.

Comments are requested by 30 August 2000.

Press releases - w/e 2.6.00

31 May 2000 - Customs & Excise - VAT relief on constructing charity buildings

A new Extra-Statutory Concession (ESC) has been introduced clarifying the rules for charities constructing new buildings to obtain zero-rating for construction works. The ESC provides different methods to calculate the extent of qualifying non-business use.

1 June 2000 - Inland Revenue - Voluntary tax savings scheme for share fishermen

A voluntary tax saving scheme has been launched by Barclays Bank with the help of the Inland Revenue to enable share fishermen in England, Wales and Northern Ireland to have tax deducted from their earnings to meet their tax and Class 4 national insurance liabilities. (Class 2 liabilities will still have to be paid separately.) A similar scheme already operates in Scotland.

Extra week to pay VAT

Last week's Weekly Tax Briefing listed Customs' press release of 23 May which announced that the seven day extension for businesses paying their VAT electronically would now be given automatically. It should be noted that this extension still does not apply to businesses within the Payment on Account and Annual Accounting schemes.

For further information, or assistance, please speak to your usual KPMG tax 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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