UK: VAT Focus - A Round-Up Of Recent VAT-Related Developments, October 2009

Last Updated: 1 November 2009
Article by Martin Sharratt

VAT rate change 1 January 2010

The standard rate of VAT will return to 17.5% on 1 January 2010. This increase in VAT will have an immediate bottom-line impact for businesses selling goods or services that cannot immediately increase prices and for businesses that are unable to reclaim VAT in full.

Businesses selling goods or services spanning the VAT rate change must determine the correct rate of VAT to apply, subject to complicated rules. There are special provisions which allow the existing 15% rate to be used in certain circumstances after 1 January 2010. However, 'anti-forestalling' legislation will restrict the extent to which the 15% rate can be applied after 1 January 2010 to prevent the abuse of these special provisions.

Businesses will need to make sure accounting systems are updated and possibly re-programmed to allow for the change that will be required at midnight on 31 December 2009, and to allow for any use of the special provisions for the 15% rate to continue after 1 January 2010.

What next?

If you require assistance with the rules relating to the change of VAT rate, or guidance on making use of the special provisions to prolong the use of the 15% rate, please speak to your usual Smith & Williamson contact.

A more detailed briefing note is available, please contact us, or visit our website for a copy.

2010 place of supply rule change – reminder

If your business provides or receives services from outside the UK, you should be aware of the changes to the place of supply rules for services, which take effect from 1 January 2010.

From this date, the general rule for the place of supply of services for all businessto- business supplies of services will be the place where the customer is established, instead of where the supplier is established, as is currently the case. There are of course a number of exceptions and special rules for certain services, such as supplies related to land, passenger transport and cultural and artistic services among others.

These changes will affect all UK businesses that make taxable supplies of services to business customers in other European Union (EU) countries where the customer is required to account for VAT under the 'reverse charge' procedure.

One of the most important practical changes that businesses will need to consider will be the requirement to complete European Commission Sales Lists for supplies of taxable services to which the reverse charge applies.

What next?

Businesses that are affected will need to consider the impact these changes will have in relation to their current VAT treatment and also ensure that they comply with the additional reporting requirements. For further information, please get in touch with your usual Smith & Williamson contact.

Compound interest claims

Historically, HMRC has only paid out simple interest on VAT reclaims by taxpayers for 'errors' made by HMRC. Over recent months, a number of taxpayers have challenged this payment of simple interest through the courts, arguing that correct restitution for the 'VAT loss' suffered should be compound interest.

The most recent case on compound interest on VAT repayments, John Wilkins (Motor Engineers) Limited & Others (LON/08/1101), involved a number of motor dealers that had previously submitted VAT repayment claims to HMRC and had been paid simple interest on those claims i.e. interest on just the principal sum rather than interest on the principal amount plus interest accrued on that sum.

The Tribunal found that claims for compound interest could not be entertained under UK VAT law. It also concluded that the correct route for claiming compound interest on overpaid (under-recovered) VAT is by issuing High Court proceedings against HMRC in restitution. In this particular case the claim was also out of time in terms of restitution as more than six years has lapsed since the original payments of VAT and 'simple interest' had been paid out.

That said, this is not the end of the road for these claims as both the Tribunal case and the VAT Interest Cars Group Litigation case (EWHC 952 (Ch)) have been appealed, and are likely to be heard together in the Court of Appeal in the near future.

What next?

If you have overpaid or under-claimed VAT you should consider whether to issue a High Court claim for compound interest, and await the final decision of these Court cases. If this affects you, please speak to your usual Smith & Williamson contact.

VAT fraud and carbon credits

The VAT treatment of the sale of carbon credits has recently been changed by the UK Government in order to combat 'missing trader' fraud. It was announced on 30 July that the VAT liability of the sale of carbon credits in the UK would be changed from midnight and all such traders are now zero rated. This followed similar moves in France and the Netherlands.

The EU has now announced that they are proposing an optional scheme for member states to use a reverse charge mechanism for the sale and/or purchase of greenhouse gas emission allowances (certified carbon credits) as well as selected other goods that are at risk of missing trader fraud, including computer chips, mobile phones, precious metals, and perfumes.

If you have business in any of these areas where VAT fraud is an issue, you will need to demonstrate that you have followed the verification and reporting requirements to the letter. The onus is being pushed onto businesses to verify the VAT status of the supplier of the goods. Otherwise, HMRC may hold you responsible for any VAT fraud it discovers in any chain of purchases in which the business is involved.

What next?

If your business is affected by this and you would like to discuss this matter further, please get in touch with your usual Smith & Williamson contact.

HMRC reviews investment management fees

Investment managers should be aware that the VAT treatment of certain charges is under review by HMRC. HMRC is saying that dealing commission charged by fund managers should be subject to VAT, along with their discretionary fund management fees. It is also being suggested that VAT should be charged on some introductory fees charged to fund managers that are currently treated as exempt. Although initially the argument centres on discretionary fund management services supplied to private clients, the same principle could be applied to other financial services where both taxable and exempt supplies are made.

What next?

If this affects your business, or if you supply a mixture of taxable and exempt supplies to your clients, you should make sure that the VAT treatment of your supplies is correct. For further information, please speak to Martin Sharratt, whose contact details are listed below.

Revoking an option to tax

The recent passing of the 20th anniversary of the option to tax provides a new opportunity for landlords and property owners to revoke any options to tax made more than 20 years ago.

It is recommended that landlords and property owners review 'options to tax' made in the past, looking at whether revocation would be advantageous and whether this is possible.

Future supplies in relation to any property where the option to tax has been revoked will be exempt from VAT. This may be attractive where a tenant or purchaser is unable to recover all of the VAT it incurs. It may also have a direct tax benefit on the sale of a property by saving Stamp Duty Land Tax for the purchaser, as this is charged on the VAT inclusive price. Also, in difficult times when 'cash is king' not having to pay and recover VAT could be a significant commercial advantage.

What next?

If this concerns your business and you would like to discuss whether revocation would be the best course of action, or to check whether you have considered all of the tax ramifications, please speak to 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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